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How  to 

Analyze   Railroad 

Reports 


How    to    Analyze    Railroad 
Reports 


By  JOHN  MOODY 
Author,   Moody's  Analyses  of  Railroad  Inve§tments. 
The  Art  of  Wall  Street  Investing,  etc. 
Editor,  Moody's  Magazine 


SECOND    EDITION 


Published  by 

ANALYSES      PUBLISHING       CO 

35   Nassau   Street,    New  York  City 
1912 


Copyright,  1912,  by 

ANALYSES  PUBLISHING  COMPANY 

NEW  YORK 

All     Rights    Reserve 


HE 

PREFACE 

^  For  many  years  there  has  been  a  demand  among 

;^      bankers    and    investors    for    a    popular   but    complete 
>.       presentation  of  the  proper  principles  for  analyzing  the 
\      reports  of  steam  railroads.   Many  years  ago  an  attempt 
"^      was  made  by  Mr.  Thomas  F.  Woodlock,  at  that  time 
]^      editor  of  the  "Wall  Street  Journal,"  to  explain   the 
■^      methods   then  in  general  vogue   by   the  railroads   in 
_      presenting  their  operations  and  financial  condition  to 
their  stockholders,  and  his  little  work  ("The  Anatomy 
of  a  Railroad  Report")  went  through  many  editions. 
4;      and  was   the   only   authoritative   presentation    of   the 
J      subject  which  was  available  to  the  general  public. 
~  Since  those  days  the  methods  of  railroad  account- 

"^      ing  have  been  very  largely  changed,  and,  it  must  be 
p      agreed,  vastly  improved.    The  Uniform  Requirements 
^     of  the   Interstate   Commerce  Commission   have   done 
^     much  in  recent  years  to  simplify  for  the  investor  in 
""      railroad   stocks  and  bonds,   the  meaning  and   signifi- 
-*^   cance  of  the  various  exhibits  and  accounts  presented 
_^     annually  in  the  formal  reports  of  the  companies.     The 
j     requirement     that     all      railroad      accounts      shall      be 
made  up  on  a  uniform  plan,  and  that  the  various  de- 
partments of  the  business  shall  be  presented  in  proper 
detail,  has  made  it  possible  for  intelligent  comparisons 
of  results  and  methods  to  be  made  with  respect  to 
every    railroad    system    in    the    country.      Thus,    the 


proper  analysis  of  the  railroad  report,  with  intelligent 
deductions  made  therefrom,  is  a  distinct  guide  to  the 
holder  of  the  securities  in  judging  the  very  important 
questions  of  intrinsic  values  as  well  as  prospective 
change. 

The  principles  outlined  on  the  following  pages,  for 
analyzing  railroad  statistics,  are  the  result  of  many 
years  of  study  of  the  general  subject  of  railroad  opera- 
tion, management  and  finance,  and  constitute  the  basis 
on  which  the  much  larger  work,  "Moody's  Analyses 
of  Railroad  Investments,"  issued  annually,  has  been 
built  up. 

J.  M. 


Table  of  Contents 

Introduction  :  paces 

I.     Preliminary  Statement 11 

11.     The  Railroad  :  Its  Normal  State 19 

III.  First  Steps  in  the  Analysis 25 

IV.  The  Location  of  the  Railroad 33 

V.     The  Management  of  the  Railroad 45 

VI.     The  Results  of  the  Decade 53 

VII.     Relative  Values— The  "Railroad-Mile" 59 

The  Physical  Factors  : 

VIII.     Physical  Factors  in  the  Railroad 67 

IX.     Average  Miles  Operated 69 

X.     Equipment    75 

XI.     Proportion  of  Freight  to  all  Traffic 81 

XII.     Passenger  and  Freight  Density 83 

XIII.  Average  Freight  Train  Load 89 

XIV.  Train-mile  Earnings  93 

XV.     Passenger  and  Freight  Rates 99 

The  In'come  Factors: 

XVI.     Earnings   and  Their  Distribution Ill 

XVII.     The  General  Income  Account 123 

XVIII.     The  Operating  Revenues 125 

XIX.     The  Maintenance  Accounts   133 

XX.     Transportation  and  Other  Operating  Expenses.  141 

XXI.     Outside  Operations   145 

XXII.     Net  Operating  Revenues    147 

XXIII.  "Other  Income"  and  Total  Net  Income 151 

XXIV.  Fixed  Charges  and  the  Margin  of  Safety 159 

XXV.     Disposal  of  Surplus 169 

The  Capitalization  Factors  : 

XXVI.     Assets  and  Liabilities  of  the  Railroad 177 

XXVII.     The  Balance  Sheet 181 

XXVIII.     The  Capital  Assets 185 

XXIX.     The    Capital    Liabilities 189 

XXX.     Capitalization    of    Rentals 195 

XXXI.     Stocks   and    Bonds    Per   Mile 199 

XXXI  I.     Net    Capitalization    207 

XXXIII.     Net   Income   on   Net   Capital 211 

Appendix:  Outline  of  Uniform  Accounting  Re- 
quirements for  Operations  of  Steam  Rail- 
roads       - '  "* 


INTRODUCTION 


Preliminary  Statement 

The  first  question  usually  considered  by  one  who 
contemplates  investing  money  on  a  partnership  basis  in 
a  business  enterprise  is  the  possibility  of  expansion  in 
earning  power.  Few  persons  will  knowingly  place  their 
funds,  on  such  a  basis,  in  any  undertaking  which  is  not 
currently  earning  a  satisfactory  return,  and  only  a  limited 
number  will  consider  going  into  a  paying  business  unless 
they  are  convinced  that  there  are  possibilities  of  growth 
and  expansion  ahead,  in  the  amount  of  profits  to  be 
secured.  The  hope  that  his  money,  thus  invested,  will 
earn  from  year  to  year  an  increasing  return,  is  usually 
the  motive  that  induces  a  man  to  place  his  capital  at 
risk  on  the  same  general  basis  that  the  active,  or  work- 
ing, partner  gives  his  time,  his  labor  and  the  fruits  of 
his  training  or  experience. 

The  stockholder  in  any  corporate  undertaking  is  in 
precisely  the  same  position  as  the  investing  partner. 
Whether  the  enterprise  happens  to  be  a  steam  railroad, 

(11) 


12  Introduction 


a  gas  or  electric  light  company,  a  trolley  line  or  a  manu- 
facturing plant,  the  key  to  the  position  of  the  holder  of 
the  shares  will  be  the  question  of  profits. 

On  the  other  hand,  when  a  person  loans  funds  to  a 
business  undertaking  and  receives  some  sort  of  security 
therefor,  the  primary  fact  for  him  to  ascertain  is  not 
the  amount  of  profits  or  the  future  prospects  of  the 
business  but  the  value  and  character  of  the  property 
which  is  given  as  security  for  the  loan.  In  other  words, 
he  places  his  capital  at  work  by  loaning  it,  not  to  get 
the  benefit  of  increasing  earning  power  or  to  share  in  the 
future  possibilities  of  growth  and  expansion  of  the  busi- 
ness, but  to  insure  himself  a  certain  fixed  return  on  his 
money,  for  a  fixed  period,  and  without  regard  to  changes 
in  the  character  or  volume  of  the  business,  for  the  carry- 
ing on  or  development  of  which  the  money  may  have 
been  borrowed. 

The  bondholder  in  the  corporate  undertaking  is, 
strictly  speaking,  in  this  position.  As  the  stockholder  is 
the  owner,  the  bondholder  is  the  loaner.  Just  as  the 
holder  of  the  shares  bears  the  position  of  investing  or 
inactive  partner,  the  bondholder  stands  in  the  same  rela- 
tion to  the  corporation  as  does  the  man  who  loans  money 
on  a  piece  of  real  estate  on  bond  and  mortgage  or 
makes  personal  advances  to  another  on  satisfactory 
security  or  guaranty.  The  bondholder  is  the  man  who 
holds  the  'T  O  U"  and  is  (theoretically)  secured  against 
loss;  the  stockholder  is  the  sharer  in  both  profits  and 
losses. 

Briefly  stated,  therefore,  a  share  of  stock  in  any  kind 


Preliminary  Statement  13 

of  corporation  represents  ownership  of  a  part  of  that 
corporation's  property.  Thus,  the  man  who  buys  a  stock 
is  in  reahty  going  into  partnership  with  others,  be  those 
others  many  or  few,  and  is  assuming  the  general  business 
risks  which  are  naturally  inherent  in  all  partnerships. 
A  bond,  on  the  other  hand,  never  represents  ownership, 
but  is  simply  a  loan  (or  a  portion  of  a  loan),  usually 
(but  not  always)  secured  on  a  stated  piece  of  property. 
A  person  who  buys  a  bond  is  not  acquiring  any  actual 
ownership,  but  is  merely  loaning  money  to  those  who 
are  the  owners.  If  A  invests  a  thousand  dollars  in  New 
York  Central  stock  and  B  invests  a  thousand  dollars  in 
New  York  Central  first  mortgage  bonds,  the  A  who  is 
the  owner  (jointly  with  others)  of  the  New  York  Central 
&  Hudson  River  Railroad,  is  (jointly  with  others)  bor- 
rowing one  thousand  dollars  from  B,  who  (jointly  with 
others)  agrees  to  loan  money  to  the  enterprise,  and  take 
as  security  a  first  lien  on  the  property  which  A  and  his 
associates  own. 

But  between  the  two  generic  types  of  corporate 
securities  (mortgage  bonds  and  plain  stocks)  there  are 
other  classes  which  partake  more  or  less  of  the  char- 
acteristics of  both.  This  is  particularly  true  in  the  vast 
field  of  a  steam  railroad  securities.  In  the  characteristics 
of  stocks,  the  relationship  to  the  partnership  principle 
is  qualified  in  many  instances  and  degrees.  Thus  we 
find  that  many  stock  issues  are  "preferred"  as  to  position 
or  interest  in  the  undertaking.  This  preference  is  some- 
times limited  to  a  prior  claim  on  the  earning  power  or 
profits ;   in   other   instances   it   covers   also   the   tangible 


14  Introduction 


assets  of  the  corporation  in  the  event  of  liquidation ;  and 
in  still  other  cases  it  embraces  also  the  voting  power,  pre- 
ferred holders  sometimes  having  a  voting  privilege  to 
the  exclusion  of  the  other  stockholders.  An  example 
of  this  is  shown  in  the  case  of  the  Rock  Island  Com- 
pany, where  the  preferred  stockholders  possess  the  right 
to  elect  a  majority  of  the  board  of  directors.  In  like 
manner,  there  are  instances  where  the  voting  privilege 
is  withheld  from  preferred  shareholders  in  consideration 
of  the  preference  granted  them  for  a  prior  division  of  or 
claim  on  income ;  and  ordinarily  they  also  forego  all 
claim  on  further  profits  beyond  the  fixed  amount  for 
which  they  have  preference  before  any  dividends  are 
paid  on  any  other  classes  of  stock.  In  this  limitation 
of  income  the  preferred  stock  partakes  of  one  of  the 
characteristics  of  the  ordinary  bond. 

In  still  other  instances  the  preferred  stock  is  given 
a  lien  on  the  property  similar  to  that  of  a  mortgage 
bond,  and  there  are  cases  existing  where  stock  issues 
are  secured  jointly  with  bond  issues  and  where  stock 
issues  have  a  prior  lien  over  certain  bonds.  Some  pre- 
ferred stock  issues  share  with  the  common  stocks  in 
further  dividend  disbursements  after  their  own  fixed 
amount  of  dividend  has  been  paid.  A  case  in  point  is 
that  of  the  Chicago  &  North  Western  Railway.  Here 
we  find  that  the  preferred  stock  has  prior  right  to  7 
per  cent  per  annum,  after  which  the  common  stock  is  to 
receive  7  per  cent.  Then  the  preferred  has  a  further 
preference  to  3  per  cent ;  then  the  common  is  entitled  to 
3  per  cent  more,  after  receivmg  which  both  classes  of 


Preliminary  Statement  15 

stock  share  pro  rata  in  any  further  division  of  profits 
which  may  occur  within  the  year.  Many  other  examples 
might  be  given  of  similar  provisions. 

Thus  it  will  be  seen  that  the  varying  terms  in  stock 
issues  of  railroads  and  other  corporations  have  a  tendency 
to  qualify  the  shareholder's  position  as  a  plain  business 
partner.  The  preferred  shareholder,  while  still  being 
bound  up  as  one  of  the  owners  of  the  enterprise,  is  ac- 
corded a  prior  claim  on  income  or  on  assets,  in  con- 
sideration of  agreeing  to  be  content  with  only  a  fixed 
amount  of  the  profits  per  year,  and  allowing  the  other 
partners  to  divide  up  the  balance.  He  therefore  holds 
a  dual  position,  and,  while  one  of  the  owners  of  the  prop- 
erty, as  every  shareholder  is  an  owner,  he  at  the  same 
time  holds  a  prior  claim  on  the  income  as  the  loaner 
or  bondholder  does. 

But  while  the  preferred  stockholder  enjoys  the  bene- 
fits of  this  prior  claim  on  income  or  assets,  he  is  still 
a  stockholder  only  and  his  claim  relates  only  to  what 
surplus  income  or  assets  may  remain  over  after  the  rights 
of  all  bondholders  have  been  satisfied.  In  brief,  while 
his  position  is  superior  to  that  of  the  common  stock- 
holder or  ordinary  partner,  his  preference  is  entirely 
subsequent  to  that  of  the  loaners  or  bondholders. 

The  characteristics  of  bond  issues  also  vary  so  largely 
that  the  position  of  the  bondholder  is  often  shifted  to 
that  of  limited  partner,  or  both  partner  and  creditor. 
There  are  many  railroad  bond  issues  which  provide  for 
voting  power  under  certain  conditions ;  there  are  others 
which  receive  their  interest  only  when  currently  earned 


IT)  Introduction 


by  the  corporation;  there  are  still  others  which  partici- 
pate jointly  with  stock  issues  in  division  of  certain  in- 
come, while,  of  course,  there  are  numerous  classes  of 
mortgages,  from  first  mortgage  down,  which,  in  one  way 
or  another,  qualify  or  limit  the  position  and  security 
of  the  particular  issue  and  its  claim  on  income.  In- 
stances of  bond  issues  carrying  voting  power  are  the 
Erie  Railroad  prior  lien  and  general  lien  4s,  each  one 
thousand  dollar  bond  being  entitled  to  ten  votes;  this 
being  equal  to  the  voting  power  on  ten  shares  of  stock  of 
the  par  value  of  one  hundred  dollars  each.  The  three 
issues  of  Preference  Incomes  of  the  Central  of  Georgia 
Railway  are  examples  of  bond  issues  which,  while  being 
directly  secured  by  mortgage,  at  the  same  time  receive 
interest  only  when  earned  by  the  company  and  distributed 
in  the  discretion  of  the  board  of  directors. 

The  point  which  it  is  desired  to  emphasize  by  the 
foregoing  statement  of  simple  facts,  is  that  while  bond 
and  stock  issues  of  corporate  undertakings  represent, 
technically,  two  absolutely  distinct  classes  of  obligations, 
yet  through  qualification  of  terms  and  modification  of 
original  forms,  these  two  great  classes  of  securities  so 
blend  and  interlace  in  modern  corporate  finance,  that 
their  values  as  investments  must  be  ascertained  largely 
by  the  same  methods  of  analysis.  Many  bond  issues 
which  are  secured  by  direct  first  mortgage  are  in  every 
sense  less  secure  and,  therefore,  less  valuable  than  many 
stock  issues  are,  while  some  mortgages  which  are  secured 
by  a  fourth  or  fifth  lien  on  certain  railroads  are  far  more 
attractive  as  investments  than  many  others  which  have 


Preliminary  Statement  17 

no  prior  hens  ahead  of  them.  Thus  the  Reading  Com- 
pany general  4s,  secured  by  collateral  and  a  junior  mort- 
gage on  the  main  lines  of  the  Philadelphia  &  Reading 
Railway  are  in  every  way,  more  desirable  than  such 
issues  as  the  Lake  Erie  &  Western  Railroad  first  5s, 
which  have  no  liens  whatever  ahead  of  them. 

And  to  carry  the  illustration  a  little  further,  the  two 
large  issues  of  Lake  Shore  &  Michigan  Southern  de- 
benture 4s,  not  secured  by  mortgage  at  all,  and  being 
merely  promises  to  pay,  like  the  ordinary  note,  are 
at  least  equal,  as  safe  and  conservative  investments,  to 
the  Southern  Railway  first  consolidated  5s,  which  are  a 
first  mortgage  on  over  nine  hundred  miles  of  road,  and 
secured  in  addition,  subject  to  prior  liens,  on  over  three 
thousand  four  hundred  miles  more.  The  Atchison  con- 
vertible 4s,  the  Norfolk  &  Western  convertible  4s,  and 
the  Union  Pacific  convertible  4s,  none  of  which  have  any 
mortgage  lien  whatever,  are  regarded  as  stronger,  in- 
dependently of  the  special  attractiveness  of  the  "con- 
vertible" privilege,  than  issues  like  the  Toledo,  St.  Louis 
&  Western  prior  lien  4s  or  the  Denver  &  Rio  Grande 
first  mortgage  4s. 

While,  in  the  abstract,  the  value  of  a  mortgage  bond 
depends  on  the  value  of  the  property  back  of  it,  and 
this  is,  as  already  pointed  out,  the  first  primary  question 
to  be  determined  by  the  prospective  bond  investor,  still 
as  a  matter  of  practice  in  the  great  majority  of  cases 
the  vital  questions  of  income  results  and  possibilities  of 
future  growth  and  expansion  in  the  property  must  come 
in  for  full  consideration,  just  as  they  must  in  tlie  cases 


18  Introduction 


of  analyzing  the  ordinary  stock  issues.  In  railroads, 
above  all  oilier  classes  of  enterprise,  the  basis  of  value 
is  the  earning  power.  Money  is  loaned  on  realty  or 
other  specific  security  in  more  liberal  amount  and  on 
better  terms  to  the  borrower  in  some  cases  than  in 
others,  the  consideration  that-  the  borrower  is  a  suc- 
cessful business  man,  making  progress,  with  probably 
a  good  future  ahead,  adding  to  his  credit  and  being 
regarded  in  itself  as  increasing  the  security  of  the 
loan.  Precisely  the  same  principles  apply  when  a 
great  railroad  or  other  corporation  is  seeking  loan- 
able funds,  and  the  Pennsylvania  Railroad  can,  on 
its  simple  promise  to  pay,  borrow  many  millions  on 
better  and  closer  terms  than  can  the  Missouri  Pacific 
borrow  a  trivial  amount  even  when  putting  back  of  the 
loan  property  of  admittedly  greater  value  than  the  amount 
of  the  loan  itself.  Briefly,  it  is  much  easier  to  borrow 
on  good  terms,  whether  the  case  be  that  of  an  individual 
or  a  corporation,  if  your  past  record  and  prospects  of 
growth  and  stability  are  good,  than  it  is  if  your  record 
is  bad  or  your  prospects  are  uncertain. 

It  will  be  clearly  seen,  therefore,  that  in  any  analysis 
for  ascertaining  the  values  of  either  high-grade  or  in- 
ferior securities,  the  earning  capacity  of  the  property 
represented  must  be  weighed  and  considered  in  advance 
of  everything  else. 


n 

The  Railroad:     Its  Normal  State 

The  question  of  earning  power  applies  with  peculiar 
force  to  the  steam  railroad  corporation.  In  the  railroad 
we  have  a  type  of  property  which  is  essentially  dis- 
tinctive and  unlike  other  business  undertakings.  The 
value  of  the  railroad  does  not  depend  mainly  and  pri- 
marily on  its  length  or  location,  its  volume  of  business, 
capital  invested  or  the  appraised  worth  of  its  tangible 
property.  While  these  matters  must  come  in  for  due 
consideration,  they  are  not  the  primary  factors.  The 
property  owned  by  a  railroad  company  is  not  like  that 
owned  by  a  realty  company,  a  department  store  or  an 
ordinary  manufacturing  concern.  A  realty  company  can 
stop  business  and  still  retain  the  value  of  its  assets ;  a 
manufacturing  concern  can  shut  down  for  extended 
periods  and  still  retain  the  bulk  of  its  value  more  or 
less  intact ;  a  department  store  can  move  its  business  or 
change  its  policy  or  methods  and  may  run  but  slight 
risk  of  loss.  Also,  the  owner  of  a  patent,  a  corner  lot, 
or  the  holder  of  a  tract  of  coal  or  ore  deposits,  can  stop 
business  and  go  to  foreign  lands,  and  the  value  of  his 
property  may  keep  on  increasing,  year  after  year.  But 
not  so  the  railroad.     The  normal  condition  of  tlie  rail- 


20  Introduction 


road  is  that  of  motion,  not  rest.  A  railroad  which 
stopped  running  its  cars  would  soon  find  its  assets  shrink- 
ing to  nominal  figures,  and  while  it  might  own  valuable 
terminals  and  rights  of  way,  yet  their  chief  value  is 
usually  bound  up  in  their  use  as  a  railroad  route  and 
for  railroad  purposes.  It  is  often  said  that  the  terminal 
properties  in  great  cities  owned  by  the  modern  railroads 
are  assets  of  vast  and  steadily  increasing  value,  as  they 
give  the  roads  advantageous  entrances  into  rapidly  grow- 
ing centres  of  population  in  all  parts  of  the  country. 
This  is  true,  but  the  fact  must  not  be  overlooked  that  in 
relation  to  the  capitalized  values  of  the  railroads  them- 
selves, as  reflected  by  issues  of  stocks  and  bonds,  the 
terminal  and  other  tangible  realty  values  owned  by  the 
railroads  are  but  a  small  proportion  of  the  whole.  The 
wonderful  Pennsylvania  terminals  in  and  about  New 
York  City  are  probably  worth  upward  of  $150,000,000, 
and  will  rise  steadily  in  value  as  New  York  City  ex- 
pands in  population.  But  to  the  Pennsylvania  Railroad 
Company,  or  to  anybody  else,  they  are  mainly  valuable 
in  the  use  to  which  they  are  put  as  a  part  of  the  railroad 
system.  Abandoned  for  transportation  uses  the  tunnels 
would  be  worthless,  and  the  realty  would  simply  retain 
the  normal  value  given  it  by  the  presence  and  move- 
ment of  population. 

When  it  is  once  clearly  realized  that  railroad  prop- 
erty is  normally  and  essentially  property  in  motion  and 
that  its  value  depends  primarily  on  facts  connected  with 
never-ceasing  action,  the  starting  point  has  been  reached 
for  an  analysis  of  railroad  securities.     But  it  is  difficult 


The  Railroad:  Its  Normal  State  21 

for  the  untrained  mind  to  picture  to  itself  the  far-reach- 
ing meaning  of  this  normal  condition  of  motion.  We 
place  before  our  eyes  a  map  of  the  amazing  net  of  rail- 
road lines  stretching  over  the  vast  expanse  of  the  con- 
tinent, and  crossing,  recrossing,  and  interlacing  in  the 
more  populous  sections  until  the  maze  is  so  intertwined 
and  close  that  the  entire  surface  seems  to  be  covered  with 
railroad  tracks.  We  read  statistics  of  the  vast  mileage 
of  these  railroad  systems ;  how  companies  within  single 
States  own  or  control  trackage  enough  to  stretch  from 
New  York  to  San  Francisco  and  return.  We  see  reports 
of  the  many  millions  invested  in  rights  of  way,  in  struc- 
tures and  bridges,  in  equipment  and  in  terminals.  We 
learn  of  the  great  tonnage  capacity  of  modern  freight  cars 
and  the  wonderful  speed  of  passenger  trains,  annihilating 
time  and  space  and  bringing  distant  communities  into 
the  closest  commercial  touch  with  each  other.  .\11  these 
specific  things  we  understand  and  they  appeal  to  our 
imagination,  but  it  is  not  so  easy  to  realize  the  financial 
significance  of  the  aggregate  motion  and  wear  and  tear 
which  are  ceaselessly  going  on,  daily,  throughout  the  year 
and  the  decade,  without  beginning  and  without  end.  One 
pictures  in  the  mind  a  great  waterway  like  the  Mississippi, 
but  fails  to  realize  its  never-ceasing  motion,  and  that  each 
day  sees  a  renewal  of  the  vast  waters  that  through  the 
ages  have  been  flowing  to  the  sea.  So  one  forgets  that 
the  very  life  and  existence  of  the  vast  railway  net  (and 
consequently  its  value)  is  bound  up  with  the  movinc. 
daily  and  hourly,  of  hundreds  and  thousands  of  trains, 
laden  with  goods  and  passengers,  the  aggregate  tonnage 


22  Introduction 


and  numbers  of  which  daily  run  into  the  miUions.  While 
nearly  20  per  cent  of  all  the  able-bodied  men  in  the 
United  States  are  engaged,  year  in  and  year  out,  in  op- 
erating this  vast  industry  of  railroading,  a  very  much 
larger  number  of  the  entire  population  of  the  country  are 
constantly  being  transported  from  point  to  point'on  these 
trains.  And  of  the  vast  products  of  the  mines  and  the 
mills,  of  the  farms  and  grazing  and  agricultural  regions, 
as  well  as  manufactured  goods  of  every  kind,  the  rail- 
roads have  daily  in  their  possession,  as  carriers,  a  fabulous 
total. 

In  fact,  properly  to  picture  in  the  mind  the  railroad 
and  its  function,  we  must  picture,  practically,  a  whole 
nation,  not  fixed  or  in  repose,  but  in  constant  motion, 
its  population  moving  by  the  million,  from  hour  to  hour 
and  from  day  to  day,  and  its  wealth,  in  vast  aggregates, 
being  shifted  from  point  to  point  and  back  again,  the 
goods  moved  to-day  being  replaced  to-morrow  in  equal 
or  greater  volume,  just  as  the  waters  of  the  rivers  which 
are  to-day  emptied  into  the  Gulf  are  replaced  in  never- 
ending  flow  by  new  waters  from  the  North.  Should  the 
sources  of  the  rivers  suddenly  give  out,  almost  in  a  day 
the  great  waterways  would  disappear.  And  in  the  same 
way,  should  the  railroads  cease  to  move  their  trains,  even 
for  a  day,  their  value,  and  consequently  the  value  of 
their  securities,  would  enormously  depreciate.  The  entire 
fabric  of  commerce,  of  wealth  production  and  of  con- 
sumption would  be  broken  down,  and  disaster  would 
follow  for  the  country  and  the  railroads  alike. 

Enough  has  been  said  to  intimate  not  only  that  to 


The  Railroad:  Its  Normal  State  23 

analyze  railroad  security  values  we  must  approach  the 
subject  from  the  operating  side,  but  also  that  the  ques- 
tion of  railroad  operation  is  closely  bound  up  with  the 
commercial,  industrial,  and  social  life  of  the  nation  itself. 
Without  the  business  and  social  activities  of  the  people 
the  railroads  would  be  worthless ;  while  without  the  rail- 
roads and  their  efficiency  of  operation,  there  could  be  no 
such  thing,  in  the  modern  sense,  as  commercial  and 
social  activities  at  all.  As  the  modern  world  could  not 
get  on  without  money  and  credit  systems,  in  an  equally 
true  sense  it  could  not  get  on  without  the  railroads. 

We  can  carry  this  analogy  further.  With  crude 
systems  of  banking  and  credit,  we  can  do  something; 
and  with  incomplete  or  crudely  operated  railroads  we  can 
do  something.  But  just  as  the  possibilities  for  the  pro- 
motion of  national  prosperity  are  conserved  and  pro- 
moted by  sound  and  efficient  methods  of  credit,  so  are 
they  aided  and  developed  by  efficient  and  progressive 
methods  of  railroad  operation.  With  the  inefficiency  of 
the  railroads  of  fifty  years  ago,  even  though  they 
stretched  over  the  entire  continent  and  represented  as 
much  mileage  as  they  do  to-day,  we  could  probably  not 
transport  over  their  lines  more  than  20  per  cent  of  the 
passengers  and  goods  that  we  now  transport ;  and  where 
the  railroads  of  the  country  to-day  show  a  net  earning 
power  of  $4,400  per  mile,  under  such  conditions  they  would 
probably  not  be  able  to  earn  more  than  $1,000  per  mile. 

The  broad  vital  question,  then,  alike  in  railroading 
as  in  banking  and  the  mcclianism  of  exchange,  is  not 
the  size  of  the  business,  nor  the  volume  of  capital  in- 


24  Introduction 


volved,  but  the  interior  or  intensive  development  and 
perfection — the  efficiency  of  developed  means  for  carry- 
ing on  the  function  with  a  view  to  attaining  the  best 
results. 


Ill 
First  Steps  in  the  Analysis 

The  connection  of  the  railroads  with  general  condi- 
tions in  commercial  and  industrial  fields  is  so  close  that 
first  of  all  an  examination  must  be  made  of  the  character 
of  territory  through  which  a  railroad  system  runs,  and 
the  trend  of  population  over  extended  periods  in  that  ter- 
ritory must  also  be  given  due  consideration.  The  plan 
followed  for  the  analysis  of  the  different  railroad  systems 
by  "Moody's  Analyses  of  Railroad  Investments,"* 
adopts  this  point  of  view.  An  examination  of  the  dif- 
ferent statements  in  that  publication  will  show  that  the 
first  subject  taken  up  in  each  case  is  that  of  "Loca- 
tion." 

In  a  growing  country  like  the  United  States,  where 
population  is  almost  constantly  increasing,  and  where 
there  is  a  large  amount  of  shifting  in  population  and 
steady  changes  in  the  types  of  business  and  agricultural 
localities,  the  question  of  geographical  characteristics  is 

*  "Moody's  Analyses  of  Railroad  Investments,"  by  John  Moody,  con- 
tains in  detailed  form  an  expert  comparative  analysis  of  each  of  the 
railroad  systems  in  the  United  States  and  Canad.i,  with  careful  deduc- 
tions, enabling  the  Banker  or  Investor  to  ascertain  the  true  values  of 
securities  by  a  method  based  on  scientific  principles.  The  book  is  issued 
annually  at  $12  per  copy  or  $12.50  delivered.  Analyses  Publishing  Co., 
35    Nassau    Street,    New    York. 

(25^ 


26  Introduction 


of  far-reaching  importance  in  judging  or  estimating, 
from  the  investor's  point  of  view,  the  strength  or  weak- 
ness of  a  railroad  property.  For  example,  take  the  ter- 
ritory covered  by  the  modern  Atchison,  Topeka  &  Santa 
Fe  Railway  system.  This  property  consists  of  over 
11,000  miles  of  railroad,  embracing  a  trans-continental 
trunk  line,  extending  from  Chicago,  Illinois,  to  Los  An- 
geles and  San  Francisco,  California,  with  important 
branches  to  such  points  as  Galveston,  Denver,  and  El 
Paso.  It  enters  and  crosses  Illinois,  Missouri,  Kansas, 
Colorado,  Oklahama,  Texas,  New  Mexico,  Arizona  and 
California.  This  is  an  enormous  stretch  of  territory  and 
suggests  extremely  diversified  sources  of  income.  A 
portion  of  the  mileage  extends  throughout  the  fairly  well 
settled  sections  of  Illinois,  Missouri  and  Kansas ;  other 
parts  penetrate  the  vast  agricultural  regions  west  of  the 
Missouri  and  east  of  the  Rockies,  extending  far  south  to 
the  borders  of  the  Rio  Grande.  Further  to  the  West 
the  lines  enter  the  arid  regions  of  Arizona  and  New 
Mexico,  beyond  which  the  road  crosses  the  mountain 
ranges  and  traverses  nearly  the  whole  State  of  Cali- 
fornia, up  through  the  great  San  Joaquin  Valley  to  San 
Francisco  and,  with  allied  lines,  beyond  to  the  north. 

This  vast  territory  with  its  diverse  characteristics,  at 
once  indicates  that  the  Atchison  system  is  clearly  not 
dependent  for  its  prosperity  on  any  single  line  of  in- 
dustry, nor  for  its  freight  traffic  upon  any  single  type 
of  tonnage.  It  also  implies  that  different  parts  of  the 
system  are  subject  to  different  local  conditions  and  are 
affected  in  an  operating  sense  by  many  different  factors. 


First  Steps  in  the  Analysis  27 

The  fact  that  the  railroad  system  crosses  many  States  in- 
dicates that  it  is  subject  to  the  diverse  legislation  of  those 
States.  Thus,  while  the  legislation  in  the  State  of  Illinois 
may  not  be  inimical  to  the  interests  of  the  railroad,  that 
of  the  State  of  California  may.  It  will  also  be  apparent 
that,  while  the  diverse  territory  through  which  the  system 
penetrates  brings  in  many  factors  of  local  nature  to  affect 
the  earning  power,  yet  the  fact  that  the  system  constitutes 
a  trans-continental  or  through  line  connecting  two  great 
commercial  sections  emphasizes  the  importance  of  through 
traffic  in  both  passengers  and  freight.  Analysis  would 
clearly  show  that  without  its  through  business  and  con- 
nections with  the  East  for  carrying  on  economically  an 
enormous  long-haul  traffic  in  both  directions,  the  Atchison 
system  would  not  be  able  to  earn  its  dividends.  There- 
fore, considered  as  a  whole,  it  will  be  apparent  that  the 
through  business  of  the  Atchison  is  a  very  vital  factor. 
So  much  for  the  condition  of  the  territory  as  it  exists 
to-day.  But  to  know  the  trend  of  population  and  the 
rapidity  of  growth  in  the  population  in  a  given  territory, 
is  of  equal  importance  with  a  knowledge  of  its  present 
condition.  Therefore,  it  is  necessary  for  the  student  of 
railroad  security  values  to  examine  the  population  records 
over  a  scries  of  years.  It  is  difficult  in  this  country  to 
secure  exact  figures  along  this  line  except  once  in  z. 
decade,  but  within  the  past  few  years  many  of  the  States 
have  been  making  a  yearly  census  of  a  more  or  less  com- 
plete nature,  which  results  in  giving  a  fairly  accurate 
idea  of  the  movement  of  population.  In  "Moody's  An- 
alyses" the  plan  is  followed  of  going  back  as  far  as  1890 


28  Introduction 


in  the  records  of  population,  and  presenting  in  each  case 
the  figures  of  the  territory  under  review,  first  for  1890, 
then  for  1900,  and  finally  for  1910.  By  comparing  these 
figures  it  will  be  seen  that  a  sufficiently  accurate  idea  can 
be  secured  of  the  relative  changes  in  population  within 
a  twenty  year  period  to  make  the  comparison  comprehen- 
sive and  intelligent. 

It  will  be  understood  that  such  figures  of  population 
are  not  absolutely  accurate  indicators  of  the  fields  served 
by  the  particular  railroads,  as  some  roads,  of  course, 
serve  a  very  minor  proportion  of  a  given  State,  but  the 
idea  should  be  to  ascertain  as  closely  as  possible  the 
relative  growth  of  sections  in  which  the  roads  have  a 
reasonable  amount  of  mileage.  Thus,  where  a  railroad 
simply  crosses  a  corner  of  a  State,  or  has  within  the 
State  a  very  small  amount  of  mileage,  the  population  of 
that  State  should  not  be  embraced  in  the  comparison. 
Where  a  railroad  crosses  an  entire  State  or  penetrates  far 
into  it,  reaching  commercial  centres  of  importance,  the 
population  of  that  State  should  always  be   considered. 

The  great  value  of  these  comparative  population 
figures  may  be  well  emphasized  by  a  few  examples. 
Thus,  to  examine  the  New  York  Central's  operating  ter- 
ritory. We  find  that  from  1890  to  1910  the  changes  in 
population  in  New  York  State  have  been  pronounced. 
In  1890  the  population  of  the  State  was  5,997.853.  In 
1900,  a  decade  later,  the  number  had  grown  to  7,268,894, 
while  in  1910  the  figures  given  were  9.113,614.  These 
figures  of  course  imply  that  there  has  been  a  pronounced 
growth  in  both  wealth  and  general  industry  in  the  New 


First  Steps  in  the  Analysis  30 

York  Central's  territory  since  1900.  Tliey  show  that 
while,  during  the  decade  from  1890  to  1900,  the  growth 
in  population  was  only  1,271,041,  or  about  21  per  cent, 
during  the  last  ten  years  the  growth  has  been  1,844,720, 
or  over  25  per  cent,  indicating  a  more  pronounced  up- 
ward trend  since  1900,  than  prior  to  that  date. 

The  same  principle  should  be  applied  to  railroads  in 
all  sections  of  the  country-  While  in  the  Eastern  States 
the  trend  of  increase  in  population  is  less  pronounced 
than  in  the  far  W^estern  States,  yet  it  has  an  equal  effect 
over  long  periods  in  connection  with  conditions  of  rail- 
road properties.  If  we  examine  the  territory  of  the 
Chesapeake  &  Ohio  system,  the  trend  in  which  is  re- 
flected by  the  population  figures  of  Virginia,  West  Vir- 
ginia, and  Kentucky,  we  shall  find  that  during  the  past 
ten  years,  within  which  time  the  business  of  the  Qiesa- 
peake  &  Ohio  Railway  has  been  growing  by  leaps  and 
bounds,  the  population  in  this  section  has  increased  nearly 
30  per  cent  over  the  census  figures  of  1900.  Considering 
these  figures  in  connection  witli  the  history  of  the  Chesa- 
peake &  Ohio  Railway,  it  will  be  remembered  that  the 
lean  years  of  the  Chesapeake  &  Ohio  occurred  within 
the  decade  when  the  trend  of  population  was  only  slightly 
upward,  while  during  the  period  which  has  followed,  in 
which  the  material  growth  of  the  section  has  been  so 
marked,  the  road  has  reached  a  position  of  high  credit 
and  has  become  one  of  the  big  money  makers  in  the  rail- 
road field  in  this  country. 

To  take  another  example,  we  might  examine  the 
figures  of  population  for  the  State  of  Iowa,  in  connection 


30  Introduction 


with  the  operations  of  properties  like  the  Iowa  Central 
Railway.  Here  we  find  that  according  to  the  record  the 
population  of  the  State  of  Iowa  has  grown  less  than  10 
per  cent  since  1900,  and  that  the  increase  during  the  past 
ten  years  has  been  less  than  was  the  increase  for  the 
decade  following  1890.  The  effect  of  this  slow  growth  is 
reflected  in  the  results  of  those  railroads  the  mileage  of 
which  is  mainly  confined  to  the  State  of  Iowa.  The 
mileage  of  the  Iowa  Central  Railway  is  largely  so  con- 
fined, and  if  we  examine  the  operating  results  of  this 
road  for  the  past  ten  years  we  will  find  that  the  trend 
of  growth,  in  both  volume  of  business  and  in  profits, 
has  been  extremely  moderate.  While  its  business  is 
larger  than  it  was  ten  years  ago,  the  increase  has  been 
so  small  as  compared  to  that  of  roads  in  other  and  more 
diversified  territory,  that  the  relative  connection  of  popu- 
lation and  railroad  growth  is  strongly  emphasized. 

The  vast  majority  of  American  railroad  systems  have 
prospered  greatly  within  the  past  decade  and  have  been 
benefited  to  great  extent  by  the  rapid  upward  trend  in 
population  and  consequent  increase  in  commercial  and 
industrial  activities.  It  is  only  here  and  there  that  we 
find  a  setback  or  a  state  of  stagnation  in  population,  al- 
though, of  course,  some  centres  and  sections  have  shown 
a  far  greater  relative  increase  than  others.  For  example, 
the  territory  covered  by  the  Erie  Railroad  has  grown  in 
population  about  17  per  cent  since  1900;  that  of  the 
Great  Northern  has  grown  over  50  per  cent ;  the  Illinois 
Central  territory  has  grown  about  15  per  cent ;  that  of  the 
Kansas  City   Southern  about  25  per  cent;  that  of  the 


First  Steps  in  the  Analysis 


New  Haven  about  12  per  cent ;  while  the  territory  covered 
by  the  Pennsylvania  Railroad  operated  lines  has  increased 
in  population  over  18  per  cent.  It  will  be  realized,  of 
course,  that  territory  covered  by  Western  railroads  has 
increased  in  population  in  far  greater  ratio  than  has  that 
covered  by  railroads  in  the  East.  Some  sections  of  the 
South  have  also  shown  unusually  rapid  expansion  since 
1900. 

Having  ascertained  by  careful  examination  the  popu- 
lation and  its  trend  over  a  generation  within  the  ter- 
ritory penetrated  or  fed  by  a  railroad  system,  we  are 
then  in  position  to  turn  to  some  of  the  physical  char- 
acteristics of  the  railroad  property  itself.  But  before 
doing  this  it  is  well  for  the  investor  to  analyze  in  some 
detail  the  wealth  and  population  totals  which  he  has 
secured.  By  slight  effort  he  can  always  secure  from  the 
United  State  Census  Bureau,  or  other  sources,  the  details 
of  population  and  wealth,  showing  what  the  wealth  and 
population  consist  of  and  where  the  special  growth  is 
tending.  For  example,  if  he  were  interested  in  a  rail- 
road system  like  the  Colorado  &  Southern,  the  fact  that 
the  wealth  development  and  census  growth  of  Colorado 
were  chiefly  centered  about  the  terminals  and  lines  of  the 
Colorado  &  Southern  system,  would  be  a  matter  of  vital 
importance  to  him.  On  the  other  hand,  if  he  were  in- 
terested in  a  line  confined  to  another  section  of  the  State 
of  Colorado,  with  little  opportunity  for  commercial  inter- 
course with  Denver,  then  the  prosperity  of  the  latter 
place  would  not  be  of  most  importance  to  him. 

The  census  bureau  records  can  also  be  profitably  ex- 


32  Introdud;!©!! 


amined  to  learn  of  the  changing  characteristics  in  given 
territories,  such  as  agricultural  and  other  developments. 
The  enormous  sums  now  being  spent  by  National  and 
State  governments  in  the  irrigaton  of  the  arid  regions 
of  the  \\' est,  are  of  real  significance  and  meaning  to  the 
holder  or  the  prospective  buyer  of  the  securities 
of  railroads  in  those  sections.  Another  decade  of  ir- 
rigating development  in  this  territory  will  cause  many 
changes  in  industry  and  in  population  and  consequently 
in  railroad  tonnage  and  profits.  Such  facts  as  these  and 
others  along  the  line  of  manufacturing  growth,  develop- 
ment of  waterways,  opening  of  natural  resources,  and 
settlement  of  public  lands,  are  all  of  intense  interest  and 
importance  to  investors  in  railroad  shares  and  bonds, 
and  should  not  be  overlooked  in  any  careful  examination 
of  the  railroad  and  its  earning  power. 

Starting  with  this  general  geographical  knowledge  of 
the  section  which  the  railroad  penetrates,  we  can  now 
turn  with  safety  to  the  railroad  itself  and  examine  its 
report  with  intelligence,  and  analyze  its  securities  with 
reasonable  safety. 


IV 

The  Location  of  the  Railroad 

The  three  chief  elements  to  be  studied  in  analyzing 
railroad  reports  are  the  Physical  Factors,  the  Income 
Factors,  and  the  financial  or  Capitalization  Factors.  The 
physical  factors  or  characteristics  embrace  everything  of 
a  physical  nature,  such  as  the  mileage  and  location  of 
the  road,  the  equipment  owned  and  used  by  the  road, 
the  character  of  tonnage  transported  on  the  railroad,  the 
methods  of  handling  the  tonnage  and  passengers  on  the 
railroad,  the  efficiency  of  operation  of  the  trains  of  the 
railroad,  and  the  average  rates  received  per  person  and 
per  ton  for  transportation  services  performed  by  the 
railroad.  Every  railroad  report  embraces  figures  which 
to  more  or  less  extent  show  these  physical  characteristics 
Moreover,  each  railroad  in  the  United  States  doing  an 
interstate  business  is  required  to  file  full,  complete  and 
uniform  records  of  its  entire  business,  physical,  operating 
and  financial,  with  the  Interstate  Commerce  Commis- 
sion.* 

But  independently  of  the  requirements  of  the  Com- 
mission most  of  the  railroads  furnish  their  stockholders 
with  quite  complete  figures  covering  the  physical  sides 
of  their  properties.     Usually  the  railroad  report  begins 

•  See  appendix  for  detailed  explanation  of  the  Uniform  Requirements 
of    the     Interstate     Commerce     Commission. 

(33) 


34  Introduction 


with  a  statement,  in  condensed  form,  of  the  mileage 
operated.  This  statement  of  "mileage  operated"  indi- 
cates the  average  number  of  miles  of  main  track  operated 
within  a  single  year,  as  well  as  the  total  at  the  end  of  the 
year,  and  is  usually  sufficiently  elaborate  to  show  in  detail 
the  entire  mileage  of  the  system,  indicating  where  this 
mileage  is  located  and  what  points  it  reaches,  showing 
the  number  of  extra  main  tracks  and  their  mileage,  and 
also  the  mileage  of  yard  tracks,  switches  and  sidings. 
Most  railroad  corporations  also  present  with  their  annual 
reports  a  complete  map  of  the  entire  railroad  system, 
enabling  the  stock  or  bond-holder  to  see  at  a  glance  just 
where  the  railroad  runs,  what  cities  it  enters,  what  con- 
nections it  has  with  other  lines,  and  what  the  general 
character  and  type  of  territory  are  in  which  it  is  lo- 
cated. The  map  is  naturally  the  first  thing  to  be  exam- 
ined in  connection  with  the  mileage  and  the  operation  of 
the  property. 

The  majority  of  railroad  reports  are  so  arranged  that, 
following  a  statement  of  the  mileage  operated,  a  state- 
ment of  earnings,  or  a  condensed  income  account,  is 
presented.  But  to  examine  the  report  systematically  and 
scientifically,  the  location  of  the  road  and  its  mileage 
should  be  immediately  followed  up  by  an  examination 
of  the  nature  of  the  tonnage  which  is  transported  on  the 
property.  The  character  of  the  tonnage  has  direct  rela- 
tionship to  the  location  of  the  property,  and  to  the  type 
of  territory.  In  other  words,  railroads  are  directly  de- 
pendent for  their  prosperity  on  the  particular  industries 
which  are  dominant  in  the  territories  through  which  they 


Location  of  the  Railroad  35 

run,  and  the  prosperity  of  those  industries  and  their 
general  stability  are  at  the  base  of  the  success  of  the 
railroad  itself.  So  we  find  that  a  railroad  like  the 
Bangor  &  Aroostook  in  Maine  is  largely  dependent  on 
the  lumber  industry  in  that  State ;  the  Boston  &  Maine 
and  Maine  Central  are  dependent  on  diversified  local 
traffic,  their  through  business  being  a  factor  of  minor 
importance.  The  New  Haven  is  more  largely  dependent 
for  its  success  on  the  maintenance  of  passenger  rates 
than  it  is  on  the  maintenance  of  freight  rates,  as  pas- 
senger business  predominates  and  is  a  large  source  of 
revenue.  The  Reading,  New  Jersey  Central,  and  Lehigh 
Valley  are  dependent  largely  upon  stable  conditions  in 
the  anthracite  coal  fields,  and  a  large  part  of  their  value 
is  bound  up  in  their  control,  direct  or  indirect,  of  these 
great  coal  deposits.  The  Chesapeake  &  Ohio,  the  Norfolk 
&  Western,  the  Hocking  Valley,  the  Buffalo,  Rochester 
&  Pittsburg,  and  to  an  extent  the  Baltimore  &  Ohio,  Lake 
Shore,  and  Pennsylvania  are  dependent  upon  conditions 
in  the  soft-coal  industry.  Properties  like  the  St.  Paul, 
the  Chicago,  Burlington  &  Quincy,  the  Rock  Island  and 
the  Missouri  Pacific,  are  more  or  less  bound  up  with  the 
agricultural  conditions  in  the  territories  through  which 
they  run.  In  the  event  of  crop  failures  or  short  crops, 
their  earnings  are  vitally  affected,  while,  on  the  other 
hand,  in  years  of  "bumper"  crops  they  all  prosper  to 
unusual  extent.  In  the  same  way,  properties  like  the 
Southern  Railway,  tiie  Atlantic  Coast  Line,  the  Lotiisville 
&  Nashville,  and  the  St.  Louis  Southwestern  are  depend- 
ent to  a  large  extent  on  such  crops  as  cotton,  and  their 


36  Introduction 


prosperity  is  bound  up  with  that  of  this  type  of  industry. 
In  addition  to  this  there  are  other  railroads  which  derive 
a  large  proportion  of  their  traffic  from  the  products  of 
iron,  copper  and  other  mining  centres,  and  the  prosperity 
of  these  industries  affects  their  earnings  vitally. 

In  view  of  the  foregoing  facts,  it  will  be  seen  that 
a  definite  knowledge  of  the  nature  and  character  of  ton- 
nage transported  by  the  railroad  is  a  matter  of  great 
importance  to  the  owner  of  the  shares  or  bonds.  In 
"Moody's  Analyses"  these  tonnage  figures  are  given 
proper  prominence  and  wherever  possible  a  comparison 
of  the  tonnage  percentages  for  the  entire  decade,  closing 
with  the  last  fiscal  year,  has  been  presented.  In  this 
way  the  user  of  the  book  can  see  at  a  glance  the  changes, 
if  any,  which  have  taken  place  during  the  period  under 
review. 

Most  of  the  railroads  long  ago  adopted  a  uniform 
classification  for  their  freight  traffic,  and  most  of  the 
railroad  reports  present  the  classification  in  tons  in  the 
uniform  way  required  by  the  Interstate  Commerce  Com- 
mission.    This  classification  is  divided  as  follows : 

1st :  Products  of  agriculture,  embracing  such  things  as  grain, 
flour,  cotton,  tobacco,  hay,  fruit  and  vegetables,  mill  products,  etc. 

2d :  Products  of  animals,  embracing  live  stock,  dressed  meats, 
hides  and  leather,  poultry  and  game,  wool,  packing-house 
products,  etc. 

3d:  Products  of  mines,  embracing  anthracite  and  bituminous 
coal,  coke,  ores,  stone,  sand  and  similar  articles. 

4th :  Products  of  forests,  embracing  lumber  and  all  allied 
products. 

Sth :  Manufactures. 

6th:  Merchandise  and  miscellaneous  articles. 


Location  of  the  Railroad  37 

There  is  a  very  wide  diversification  in  the  character 
of  the  tonnage  transported  by  the  different  railroads,  and 
the  great  dependence  of  some  systems  on  particular  arti- 
cles for  their  tonnage  is  well  brought  out  by  an  examina- 
tion of  the  Freight  Classification  Statistics.  It  will  be 
seen,  for  instance,  that,  of  the  total  tonnage  reported  in 
1910  by  the  Lake  Shore  &  Michigan  Southern  Railway, 
about  60  per  cent  represented  products  of  mines ;  on  the 
New  York  Central  in  1910,  47  per  cent  represented  prod- 
ucts of  mines ;  on  the  Lake  Erie  &  Western  80  per  cent 
was  so  represented,  while  on  the  Lehigh  Valley  about  63 
per  cent  was  anthracite  coal.  Turning  to  Western  prop- 
erties, we  find  that  the  Missouri  Pacific,  in  1910,  depended 
to  the  extent  of  19  per  cent  on  agriculture  for  its  tonnage 
and  22  per  cent  on  forest  products.  The  Missouri,  Kan- 
sas &  Texas  reported  Z7  per  cent  in  mining  products, 
and  21  per  cent   in  products  of  agriculture. 

The  more  diversified  the  tonnage  of  a  railroad  and 
the  less  dependent  it  happens  to  be  on  any  one  or  two 
types  of  industry,  the  stronger  and  more  stable  its  traffic 
is  apt  to  be.  Thus  the  New  England  properties,  like 
the  New  Haven  and  the  Boston  &  Maine,  on  which  the 
freight  tonnage  is  unusually  well  diversified,  can  be  ex- 
pected to  make  a  more  satisfactory  showing  of  stability, 
in  good  times  and  in  bad,  than  can  those  railroads  where 
the  traffic  is  not  so  well  diversified.  The  Boston  &  Maine 
in  1911  reported  its  products  of  mines  at  25  per  cent  as 
the  highest  single  class  of  tonnage,  and  its  mining  classi- 
fication was  itself  well  diversified.  The  same  fact  is  true 
in  relation  to  the  Atchison  reports  of  recent  years. 


38  Introduction 


That  this  matter  of  tonnage  characteristics  is  a  most 
vital  one  for  the  investor  to  consider  is  well  demonstrated 
by  the  past  records  of  some  of  the  railroad  systems.  In 
the  '80s  and  early  '90s  the  Philadelphia  &  Reading  Rail- 
way, the  New  Jersey  Central  and  other  properties  in  the 
hard-coal  section  all  went  into  bankruptcy  or  approached 
very  near  to  it,  largely  as  a  result  of  disturbed  conditions 
in  the  anthracite  coal  fields.  In  those  days,  although 
many  attempts  were  made  to  maintain  the  prices  of  coal 
and  the  rates  for  the  transportation  of  the  product,  little 
success  was  attained,  and  the  outcome  was  that  dis- 
astrous price  wars  and  generally  disturbed  conditions 
broke  out  incessantly.  Finally,  after  the  depressed  period 
from  1893  to  1897,  the  coal-carrying  roads  were  generally 
reorganized  and,  through  direct  or  indirect  control  of 
the  anthracite  deposits,  they  were  enabled  to  form  a 
strong  alliance  for  the  protection  of  rates,  and  since  that 
period  have  enjoyed  unexampled  prosperity.  Should, 
however,  open  competition  break  out  anew  among  the 
coal-carrying  roads,  or  should  labor  or  other  local  con- 
ditions in  the  anthracite  fields  become  radically  unsettled, 
the  Reading  Company  would  feel  its  effect  in  earning 
power  more  quickly  and  to  more  pronounced  extent  than 
any  other  system  in  the  country.  In  the  same  way,  the 
soft-coal  properties,  such  as  the  Chesapeake  &  Ohio,  the 
Norfolk  &  Western,  and  the  Hocking  Valley  all  went 
into  the  hands  of  the  courts  at  different  times,  as  a 
result  of  unsettled  conditions  in  the  soft-coal  business  in 
their  respective  territories,  the  security  holders  suffering 


Location  of  the  Railroad  39 

in   large  degree   and  being  obliged  ultimately  to  make 
heavy  sacrifices. 

Applying  the  illustration  to  the  great  grain-carrying 
roads  of  the  West,  commonly  known  as  the  "Granger" 
lines,  we  find  that  crop  failures  or  crop  shortages  have 
in  the  past  affected  the  earning  power,  and,  therefore, 
the  standing  of  their  securities,  to  enormous  extent.  In 
the  early  '90s,  roads  like  the  St.  Paul,  the  Burlington 
and  the  Rock  Island,  which  were  the  leading  "Granger" 
roads,  extending  throughout  the  States  of  Iowa,  Kansas, 
Nebraska  and  Minnesota,  were  more  dependent  on  the 
crops  for  their  tonnage  than  any  other  railroads  in  the 
country.  Consequently,  when  the  depression  of  1893 
and  the  following  years  arrived,  these  roads  all  showed 
enormous  losses  in  income,  and  the  value  of  their  securi- 
ties shrank  to  little  more  than  half  that  of  a  few  years 
before.  The  common  stock  of  St.  Paul,  which  had  sold 
above  par  and  paid  dividends  for  years,  declined  to  less 
than  $50  a  share  and  for  several  years  paid  no  dividends 
at  all.  Its  bond  issues,  which  had  for  some  years  sold 
on  high  investment  planes,  dropped  into  the  class  of 
semi-speculative  securities  and  for  a  long  period  sold  on 
bases  of  return  far  below  the  issues  of  equal  position 
and  security  on  properties  like  the  New  York  Central, 
the  Louisville  &  Nashville,  and  the  Illinois  Central.  Bur- 
lington stock  at  the  same  time  sold  below  $60  per  share 
and  for  a  time  paid  little  or  nothing,  while  Rock  Island 
stock  reached  lower  figures  than  any  of  the  others.  Still 
other  properties  of  heavier  capital  and  less  relative  finan- 
cial strength,  like  the  Northern  Pacific,  the  Union  Pa- 


40  Introduction 


cific,  and  the  Atchison,  though  dependent  on  grain  traffic 
to  less  degree,  broke  down  completely  and  were  entirely 
reorganized ;  a  large  part  of  their  bankrupt  condition 
being  brought  on  as  a  direct  outcome  of  the  prolonged 
crop  failures. 

On  the  other  hand,  we  find  that  where  railroads  had 
the  benefit  of  a  well-diversified  traffic  during  the  period 
referred  to,  although  the  far-reaching  depression  of  those 
years  had  a  naturally  depressing  influence  on  their  earn- 
ings, they,  as  a  rule,  came  through  without  depreciation  or 
disaster.  Where  disaster  did  occur  on  a  railroad  with  di- 
versified traffic  in  the  '90s,  it  was  generally  due  to  other 
causes.  These  causes,  in  cases  like  that  of  the  Southern 
Railway,  the  Erie,  and  a  few  others,  were  largely  involved 
in  financial  questions  and  in  generally  poor  management. 
No  trouble  was  found  by  properties  like  the  New  York, 
New  Haven  &  Hartford,  the  New  York  Central  and  the 
Illinois  Central,  or  even  the  Denver  &  Rio  Grande  in  go- 
ing through  the  disastrous  period  of  depression  without 
default. 

A  large  element  in  the  strength-  of  the  modern 
"Grangers,"  such  as  the  Great  Northern,  the  Burlington, 
and  the  Chicago  &  North  Western  lies  in  the  fact  that  of 
recent  years  their  traffic  has  become  more  diversified  than 
was  the  case  fifteen  or  twenty  years  ago.  In  the  year 
1891,  the  tonnage  of  the  St.  Paul  was  made  up  to  the 
extent  of  nearly  50  per  cent  in  agricultural  products. 
But  by  the  year  1899  agricultural  products  constituted 
but  32  per  cent  of  the  total  tonnage,  while  in  1910  the 
proportion  had  been  reduced  to   19  per  cent.     On  the 


Location  of  the  Railroad  41 

Atchison  a  similar  trend  is  shown,  and  agricultural  prod- 
ucts, which  in  1910  constituted  but  21  per  cent  of  the 
total  tonnage,  embraced  a  far  heavier  proportion  twenty 
years  ago. 

Some  railroads  of  great  financial  strength,  such  as  the 
Lake  Shore,  the  Pennsylvania,  and  the  Baltimore  &  Ohio, 
still  depend  very  largely  on  the  products  of  mines  (chiefly 
coal)  for  their  tonnage.  But  in  view  of  the  character  of 
territory  through  which  they  run,  and  the  conservative 
financial  position  in  which  they  have  been  for  a  long  series 
of  years,  this  fact  is  not  of  such  dominant  importance  as 
in  the  case  of  railroads  which  are  more  heavily  capitalized 
in  relation  to  their  volume  of  business,  and  which  are 
generally  operating  on  a  narrower  margin. 

Examples  of  the  effect  of  crop  shortages  on  the  rev- 
enues of  crop-carrying  roads  are  shown  in  the  results  of 
the  Northern  Pacific,  the  St.  Paul,  the  Minneapolis,  St. 
Paul  &  Sault  Ste.  Marie,  and,  to  a  lesser  extent,  the 
Chicago  &  North  Western  during  the  fiscal  year  1911. 
All  these  roads  reported  sharp  declines  in  freight  traffic 
income,  as  well  as  in  general  net  results.  For  it  must  not 
be  overlooked  that  when  a  crop  failure  or  shortage  over- 
takes a  given  territory,  the  railroad  feels  it  through  the 
falling  off  in  general  business  activity  in  that  section, 
as  well  as  in  the  lighter  grain  tonnage.  Indeed,  the  most 
adverse  effects  are  usually  felt  months  after  the  crops 
have  been  harvested  and  transported. 

Another  point  to  be  considered  in  the  examination  of 
the  railroad  before  leaving  the  general  subject  of  Loca- 
tion, is  that  of  the  length  of  lines  and  the  geographical  size 


42  Introduction 


of  the  property  as  a  whole.  It  will  be  realized  that, 
even  where  everything  else  is  equal,  the  size  of  a  railroad 
has  much  to  do  with  its  general  strength.  A  short 
line,  even  if  enjoying  diversified  traffic  of  a  very  satisfac- 
tory nature,  is  at  a  disadvantage  as  compared  to  a  system 
of  several  thousand  miles  which  enters  many  large  cities, 
has  numerous  alliances  and  connections  with  other  lines, 
and  covers  larger  stretches  of  territory.  An  example  of 
this  is  brought  out  by  the  record  in  recent  years  of  the 
Louisville,  Henderson  &  St.  Louis  Railway,  a  small  sys- 
tem of  200  miles  which  extends  from  Louisville  to  Hen- 
derson, Kentucky,  forming  a  portion  of  the  Louisville  & 
Nashville  system,  but  operated  by  its  own  organization. 
On  this  line  the  traffic  is  well  diversified  and  the  business 
has  grown  steadily  but  moderately  for  some  years.  The 
capital  involved,  however,  is  small  and  the  volume  of 
business  comparatively  light,  and  although  the  charges  on 
the  property  under  normal  conditions  were  usually  being 
earned  nearly  twice  over,  yet  an  important  item  of  ex- 
pense in  the  nature  of  rebuilding  a  bridge  lost  by  a  wash- 
out in  1906  had  the  result  of  greatly  increasing  the  operat- 
ing costs  and  consuming  the  surplus  to  such  pronounced 
extent  that  in  1908  the  road  failed  to  earn  its  charges. 
In  this  particular  case  the  integrity  of  the  property  and 
its  securities  were  protected  by  the  close  alliance  with 
the  Louisville  &  Nashville  system,  but  had  it  been  an 
independent  road,  relying  on  its  own  resources  alone,  its 
credit  might  have  fallen  to  a  very  low  level. 

A  large  railroad  property,  however,  with  much  mile- 
age   and   consequently   larger   capital,   could    withstand 


Location  of  the  Railroad 


experiences  of  this  nature  without  feeling  them  to  any 
important  degree,  and  would,  of  course,  be  in  a  much 
stronger  position  at  all  times  to  bear  the  brunt  of  any 
local  set-backs  which  might  occur  on  different  parts  of 
its  lines.  The  depression  in  1908  in  the  lumber  indus- 
try in  the  far  Southwest  cut  the  business  of  the  small 
Gulf  &  Ship  Island  Railroad  more  than  half  in  two, 
but  the  St.  Louis  Southwestern  property,  which  also  de- 
pends largely  on  the  lumber  industry  in  that  section,  did 
not  reflect  in  its  income  anything  like  the  same  reverse. 
So  also  properties  like  the  Iowa  Central  and  Minneapolis 
&  St.  Louis,*  which  are  confined  within  single  States  or 
limited  districts,  in  spite  of  the  fact  that  they  enjoy  at 
the  present  time  a  fairly  well  diversified  traffic,  cannot 
make  as  good  a  showing  when  a  depression  overtakes  the 
country,  such  as  that  of  1910  and  1911,  as  can  roads  like 
the  St.  Paul,  the  Great  Northern,  and  the  Union  Pa- 
cific. 

Therefore,  in  considering  the  relative  positions  of  dif- 
ferent railroad  companies,  the  length  of  track,  as  well 
as  the  characteristics  of  the  territory  covered  and  the 
type  of  tonnage  carried,  is  a  matter  of  vital  importance. 
Superiority  in  these  respects  does  much  to  put  systems 
like  the  Atchison,  the  Baltimore  &  Ohio,  the  Canadian 
Pacific,  the  Great  Northern,  the  Missouri,  Kansas  & 
Texas,  the  Northern  Pacific,  the  Pennsylvania,  the  South- 
ern Railway,  the  Union  Pacific  and  the  Southern  Pacific 
in  a  more  desirable  investment  position  than  properties 


•  These  two  properties  have  now  been  consolidated ;  a  change  which 
should  obviously  strengthen  their  financial  and  operating  position,  other 
influences  aside. 


44  Introduction 


like  the  Chicago  Great  Western,  the  Toledo,  St.  Louis  & 
Western,  or  the  Mobile  &  Ohio.  One  of  the  elements  of 
strength  in  the  Southern  Railway  property  which  has 
enabled  it  to  present  a  good  record  in  recent  years  has 
been  the  fact  that  the  system  is  of  wide  extent  and  pene- 
trates much  territory.  The  Toledo,  Peoria  &  Western, 
confined  to  a  small  section,  may  make  a  fair  showing  in 
good  times,  but  fails  to  earn  its  charges  in  poor  times ; 
the  Lake  Erie  &  Western  and  the  Cincinnati,  Hamilton 
&  Dayton,  confined  within  a  narrow  range  for  their  busi- 
ness, have  been  at  a  disadvantage  to  meet  periods  of  de- 
pression, entirely  aside  from  the  matter  of  diversity  of 
tonnage. 


The  Management  of  the  Railroad 

Of  equal  importance  with  the  geographical  location  of 
a  railroad  property  and  the  physical  facts  which  grow 
out  of  that  location,  is  the  question  of  control  or  manage- 
ment. As  position  and  credit  among  individuals  is  based 
largely  on  reputation  for  ability  and  past  good  records, 
so  also  the  credit  of  a  railroad  property,  other  things 
aside,  is  better  where  that  property  is  in  the  hands  of 
men  of  acknowledged  ability,  integrity,  and  financial 
strength  than  where  the  reverse  is  true.  It  is  a  matter  of 
far-reaching  meaning  to  know  whether  a  property  is  un- 
der the  control  of  railroad  builders  or  railroad  specula- 
tors ;  to  know  whether  the  men  at  the  head  of  the  system 
are  bent  chiefly  on  operating  it  for  the  benefit  of  the  real 
owners  or  for  the  benefit  of  themselves.  In  the  days  of 
Fisk  and  Jay  Gould  the  Erie  road  had  little  or  no  credit ; 
its  volume  of  business  grew  as  its  territory  grew  in  popu- 
lation, but  the  management  was  engaged  in  making  it  a 
football  for  speculation  and  not  a  well-operated  and 
soundly  financed  business.  While  these  conditions  lasted 
and  the  standing  of  the  property  went  from  bad  to  worse, 
other  railroads  of  like  physical  character,  such  as  the 
Pennsylvania  and  the  New  York  Central,  were  being  man- 

(46) 


46  Introduction 


aged  with  ability  as  business  enterprises  and  were  steadily 
building  up  their  financial  and  operating  strength,  the 
fruits  of  which  they  have  enjoyed  in  subsequent  years. 
The  Cincinnati,  Hamilton  &  Dayton,  poorly  managed  for 
twenty  or  thirty  years,  was  finally  wrecked  under  bad 
financial  and  operating  management,  but  under  the  more 
efficient  management  of  the  present  interests,  is  showing 
operating  results  which  are  superior  to  any  in  the  past 
history  of  the  company. 

We  have  numerous  current  illustrations  of  the  direct 
influence  on  a  railroad  of  the  character  of  control.  Where 
men  have  established  a  reputation  for  superior  ability  in 
railroad  operation,  as  did  Mr.  E.  H.  Harriman,  the  entry 
into  control  of  a  property  by  such  men  immediately  af- 
fects the  position  and  strength  of  the  property,  entirely 
regardless  of  other  considerations.  Thus  we  saw  that 
when,  within  the  past  few  years,  the  Colorado  &  Southern 
property  changed  hands  and  went  under  the  control  of  the 
Hill  interests,  the  value  of  its  securities  at  once  rose  to 
a  higher  plane  than  they  had  ever  reached  before.  This 
change  in  control  did  not  imply  that  the  earning  capacity 
of  the  Colorado  &  Southern  would  materially  improve  in 
the  near  future ;  it  did  not  mean  that  the  territory  through 
which  the  Colorado  &  Southern  runs  would  necessarily 
create  more  traffic  for  the  road  under  the  new  manage- 
ment ;  nor  did  it  imply  that  the  operating  management 
or  the  general  maintenance  of  the  property  would  be  any 
better  than  they  had  been  during  the  previous  few  years. 
For  no  fault  could  be  found  in  what  had  transpired  under 
the  old  management  of  the  Colorado  &  Southern  since 


Management  of  the  Railroad  47 

they  came  into  control  a  dozen  years  ago.  The  company 
had  been  conservative  in  its  financial  policy ;  it  had  prop- 
erly conserved  its  resources  and  not  paid  out  too  much 
money  in  dividends ;  it  had  set  aside  sufficient  sums  for 
maintenance,  and  had  employed  substantial  amounts  of 
surplus  earnings  from  year  to  year  in  the  general  better- 
ment of  the  property.  But  the  fact  that  it  had  now  be- 
come an  integral  part  of  the  great  Hill  lines,  under  the 
dominant  control  of  Mr.  Hill  and  his  associates,  had  a 
favorable  influence  of  a  pronounced  nature.  In  other 
words,  the  record  of  Mr.  Hill  as  a  railroad  manager  of 
great  success  over  a  long  series  of  years,  is  regarded  as  an 
asset  of  unusual  significance  and  this  opinion  was 
immediately  reflected  in  the  rise  in  the  value  of  the  se- 
curities of  the  road.  Mr.  Harriman's  entry  in  1908  into 
the  Erie  Railroad  had  much  to  do  with  saving  that 
property  for  the  time  being  from  financial  disaster,  and 
his  election  as  a  director  in  the  New  York  Central  had 
much  meaning  to  the  holders  of  securities  in  that 
property. 

Therefore,  it  is  of  great  value  to  know  something 
about  the  personnel  of  those  who  are  the  responsible 
heads  of  the  railroad,  and  the  statement  of  management 
given  in  each  railroad's  report  should  always  be  carefully 
studied.  These  statements  always  embrace  a  full  list  of  the 
officers  and  directors  and  in  many  cases  full  lists  of 
the  operating  officials  are  furnished.  Little  trouble 
will  be  found  in  analyzing  the  significance  of  these 
names.  Not  only  do  they  show  managerial  strength 
or  weakness,  as  the  case  may  be,  but  the  general  in- 


48  Introduction 


tercorporate  relationships  with  other  properties  are 
indicated  in  this  way.  While  many  railroads  have 
no  alliances  with  other  lines,  in  the  technical  sense, 
owning  perhaps  no  securities  to  represent  connection 
and  control,  yet  the  personnel  of  the  directorate  may 
be  duplicated  in  many  cases.  Thus  we  find  that  men 
who  are  officers  and  directors  in  some  Eastern 
railroad  may  also  be  officially  connected  with  and  in- 
fluential in  the  management  of  other  roads  in  other  sec- 
tions of  the  country,  thus  showing  a  connection  entirely 
independent  of  that  reflected  by  ownership  of  securities, 
lease  or  other  control. 

But  the  alliances  of  this  nature  are  in  most  cases  also 
reflected  by  stock  or  bond  holdings  of  one  railroad  by 
another.  The  intercorporate  relationships  so  brought 
about  are  of  a  far-reaching  nature  and  of  great  signifi- 
cance. For  example,  the  Pennsylvania  Railroad  not  only 
controls  numerous  lines  which  are  separately  operated 
and  which  are  classed  under  the  general  head  of  the 
"Pennsylvania  System,"  but  it  has  important  stock  in- 
terests and,  therefore,  some  voice  in  the  control  or  policy 
of  a  large  number  of  other  important  railroad  companies. 
Among  these  may  be  mentioned  the  Baltimore  &  Ohio 
system,  the  New  York,  New  Haven  &  Hartford  system, 
and  the  Reading.  The  Baltimore  &  Ohio,  on  the  other 
hand,  itself  has  stock  interests  of  importance  in  the  Read- 
ing Company  and,  therefore,  in  the  New  Jersey  Central 
system.  The  Baltimore  &  Ohio  is  itself  largely  owned 
by  the  Union  Pacific  interests,  who  also  have  a  controlling 
interest  in  the  Illinois  Central  and  large  stock  holdings  in 


Management  of  the  Railroad  49 

the  New  York  Central.  In  fact,  nearly  all  the  great 
railroad  lines  hold  interests  of  some  amount  in  other 
large  systems,  in  addition  to  the  holdings  represented  by 
control  of  many  so-called  subsidiary  properties.  This 
has  resulted  in  segregating  the  railroad  mileage  of  the 
country,  in  a  broad  sense,  into  a  few  enormous  groups, 
and  the  final  question  of  managerial  policy  is  traced  to 
the  personnel  of  these  groups.  So  we  find  that  the  roads 
in  which  Mr.  Harriman  was  vitally  interested,  have  been, 
in  a  general  way,  referred  to  as  the  Harriman  group, 
and  in  the  managerial  policy  of  these  roads  the  Harri- 
man influence  was  assumed  to  be  dominant.  The  so- 
called  Hawley  group  was  made  up  of  a  number  of  offi- 
cially independent  systems  covering  great  stretches  of 
territory  and  understood  to  be  subject  to  the  same  gen- 
eral financial  and  operating  policy.  The  Morgan  roads, 
prominent  among  which,  at  the  present  time,  are  the 
Southern  Railway  and  the  Erie,  are  judged  by  the  char- 
acter of  their  control,  while  the  Hill  lines  are  classed  to- 
gether also,  and  other  systems,  such  as  the  Lacka- 
wanna and  the  St.  Paul,  have  been  regarded  as  Rocke- 
feller pro])crties. 

But  the  field  of  management  in  the  modern  railroads 
leads  us  even  beyond  the  matter  of  corporate  alliances 
and  control.  It  leads  to  the  question  of  "friendships" 
among  the  railroad  companies.  Thirty  years  ago  the 
problem  of  railroad  relationships  was  very  different  from 
that  of  to-day.  Then  the  railroad  territory,  particularly 
in  the  West,  was  wide,  and  the  field  for  extensions  was 
almost  unlimited.    There  were  no  fierce  contests  for  ter- 


50  Introduction 


ritory,  and  in  the  construction  of  new  lines  the  concern 
which  got  there  first  usually  retained  the  undisputed  con- 
trol of  the  field.  But  in  recent  years  there  have  been 
contests  of  a  severe  nature  between  great  railroad  cor- 
porations for  exclusive  rights  in  particular  places.  Some- 
times these  questions  have  been  over  terminal  privileges ; 
sometimes  they  have  related  to  the  question  of  opening 
up  new  territory  or  developing  natural  resources.  The 
most  prominent  instance  where  a  severe  contest  between 
two  great  roads  has  occurred  in  recent  years,  was  that 
of  the  Northern  Pacific-Union  Pacific  contest  in  1901, 
which  first  arose  over  a  question  of  disputed  territory  in 
the  far  West.  This  contest  finally  led  to  the  formation 
of  the  Northern  Securities  Company  and,  while  this 
company  was  adjudged  illegal  and  obliged  to  dissolve,  the 
ultimate  outcome  was  the  mutual  understanding  and  har- 
monious relationship  which  have  since  existed  between 
the  Hill  and  Union  Pacific  interests.  Another  example 
of  the  importance  of  friendly  relationships  between  the 
different  interests  is  brought  out  by  the  incident  which 
occurred  in  1908  in  connection  with  the  Harriman  and 
Gould  groups,  and  which  resulted  in  establishing  at  least 
a  friendly  understanding  between  the  Gould  party  and 
the  Union  Pacific  interests,  over  the  question  of  the  new 
Western  Pacific  line  under  construction  by  the  Goulds 
from  Ogden,  Utah,  to  the  Pacific  coast. 

The  importance  of  the  friendship  question  is  especially 
vital  when  a  smaller  railroad  is  involved.  There  have 
been  frequent  instances  where  a  small  line  of  road,  with 
good  prospects  and  doing  a  good  business,  has  met  dis- 


Management  of  the  Railroad  51 

aster  almost  entirely  because  of  a  lack  of  mutual  under- 
standing- or  because  of  unfriendly  relations  with  larger 
and  more  powerful  lines.  A  few  years  ago  a  short 
line  of  road  was  constructed  in  a  Western  State  and 
for  some  time  operated  successfully  between  two  im- 
portant points.  Attempts  were  made  by  other  inter- 
ests of  powerful  resources  to  acquire  control  of  this 
property,  but  these  attempts  resulted  in  failure.  The 
outside  interests  then  undertook  the  construction  of 
a  rival  road  at  enormous  cost,  and  because  of  their 
alliances  with  other  properties  and  their  general 
strength,  they  were  able,  within  a  compara- 
tively short  space  of  time,  to  entirely  divert  the 
traffic  of  the  weaker  road  and  cause  it  to  go  into  the 
hands  of  a  receiver.  Had  the  weaker  road  been  allied 
with,  or  had  it  arrived  at  a  mutual  understanding  with 
the  other  interests,  this  disaster  would  never  have  oc- 
curred and  the  rival  road,  which  was  really  unnecessary, 
need  never  have  been  built.  The  final  outcome  was  that 
the  weaker  property  was  absorbed  by  the  stronger,  but 
only  after  the  interests  of  the  bondholders  and  stock- 
holders had  been  heavily  sacrificed. 


VI 

The  Results  of  the  Decade 

An  important  question  in  relation  to  railroad  results 
and  earning  power  generally,  is  that  of  permanency,  and 
it  is  a  matter  to  which  entirely  too  little  attention  is  given 
by  the  average  investor.  What  the  railroad  may  have 
done  in  the  matter  of  earnings  last  year,  which  was  a 
poor  year,  may  be  a  very  poor  indication  of  what  it  can 
do  in  better  times  or  what  it  did  do  in  a  period  of  pros- 
perity. And  conversely,  the  "bumper"  earnings  of  1906 
and  1907  may  entirely  mislead  when  the  question  of  in- 
come in  1912  and  1913  comes  to  be  considered.  Many 
investors  in  both  stocks  and  bonds  were  woefully  misleci 
by  the  1906  and  1907  results  of  railroads,  just  as  they 
were  afterward  misled  by  considering  only  the  bad  figures 
of  1908,  or  the  lack  of  pronounced  improvement  in  the 
earlier  months  of   1909. 

The  truth  is  that  the  principle  of  judging  railroad 
securities  on  results  for  short  periods  is  just  as  unsound 
and  illogical  as  estimating  the  value  of  anything  else 
of  a  business  nature  without  considering  the  past  record. 
A  department  store,  if  offered  for  sale,  will  bring  more 
money  (and  it  is  worth  more)  if  it  can  present  a  record 
of  prosperity  over  a  period  of  ten  or  twenty  years,  than 

(63) 


54  Introduction 


one  which,  while  it  may  be  currently  doing  as  well  as  the 
other,  has  no  strong  record  back  of  it.  The  same  prin- 
ciple applies  with  equal  force  to  the  business  of  a  railroad. 
With  a  10-year  record  as  a  dividend  payer,  its  stock  will 
sell  currently  at  a  higher  figure  than  were  its  dividend 
record  only  two  years  in  duration ;  and  this  would  be 
true  were  all  else  equal.  An  example  of  this  is  shown 
in  connection  with  the  Kansas  City  Southern  and  the 
Union  Pacific.  Each  property  has  outstanding  a  preferred 
stock  issue  receiving  4  per  cent,  dividends  per  annum, 
and  limited  to  that  amount.  The  Union  Pacific  has  paid 
its  4  per  cent,  dividend  in  every  year  since  1899,  and  on 
the  average  for  the  decade  has  earned  the  dividend  five 
times  over.  The  Kansas  City  Southern  has  paid  its 
preferred  dividend  for  five  years  and  has  earned  a  suffi- 
cient amount  over  each  year  to  place  the  stock  apparently 
on  a  safe  and  permanent  dividend  basis.  But  there  is 
really  no  comparison  between  the  two  stocks  as  to  secu- 
rity and  position,  when  the  results  of  the  decade  are  con- 
sidered. An  examination  of  the  Kansas  City  Southern  rec- 
ord would  divulge  the  fact  that  to  show  the  same  margin 
of  surplus  beyond  dividend  payments  for  the  past  ten  years 
as  did  the  Union  Pacific  beyond  its  4  per  cent,  preferred 
dividend,  it  could  have  paid  not  more  than  1^4  per  cent, 
per  annum  on  its  preferred  stock  issue,  thus  indicating 
that,  judged  on  the  average  results  of  the  decade,  the 
Kansas  City  Southern  preferred  has  nothing  Hke  the 
secure  position  which  the  Union  Pacific  preferred  en- 
joys. 

The  same  idea  is  applicable  to  railroad  results  gen- 


Results  of  the  Decade  55 

erally ;  and  it  is  on  this  basis  of  averages  of  lo-year  re- 
sults that  the  entire  scheme  of  rnalysis  is  worked  out  in 
my  "Analyses  of  Railroad  Investments."  In  every  figure 
presented,  the  yearly  average  of  every  factor  is  presented 
for  each  year  of  the  decade,  and  then  these  yearly  aver- 
ages are  themselves  averaged,  thus  showing  the  average 
yearly  results  of  the  eniirc  decade.  By  this  method,  a 
basis  is  reached  whi-^h  strongly  emphasizes  the  element  of 
permanency  and  stability,  taking  into  consideration,  as  it 
does,  good  times  and  bad,  poor  managements  and  good, 
changes  in  costs  of  material,  of  wages  and  of  operation, 
rises  or  falls  in  freight  and  passenger  rates ;  as  well  as  the 
periodical  changes  in  character  of  traffic  and  of  ton- 
nage. 

It  is  believed  that  10-year  averages  thus  employed, 
present  as  sound  and  conservative  a  basis  for  relative 
comparison  of  results  as  can  be  found,  and  in  addition 
to  being  used  as  the  standard  for  classifying  the  security 
issues  and  giving  them  a  rating,  the  10-year  averages 
are  employed  in  the  book  for  purposes  of  comparison  with 
other  properties  of  like  general  character.  In  every  state- 
ment or  analysis  presented  in  connection  with  every  10- 
year  table,  the  10-year-average  results  of  four  other  prop- 
erties are  shown,  thus  enabling  the  user  to  make  quick 
comparison  of  every  item. 

The  soundness  and  safety  of  this  average  principle 
can  be  easily  demonstrated ;  especially  when  considered 
in  connection  with  separate  yearly  results.  On  a  property 
like  the  Atchison  or  the  Lackawanna,  where  the  entire 
record  is  that  of  great  prosperity  and  steady  growth  in 


5()  Introduction 


nearly  all  items  from  year  to  year,  the  10-year  averages 
are,  of  course,  not  as  strong  as  the  figures  of  the  past 
two  or  three  years.  But  by  using  these  averages  instead 
of  the  figures  shown  for  the  past  year  or  two,  we  dis- 
count, so  to  speak,  the  ultra-optimism  of  the  moment  and 
make  full  allowance  for  the  possible  effects  of  slower 
growth  or  prolonged  set-backs  which  in  the  decade  to 
come  may  appear  either  as  a  result  of  continued  depres- 
sion, inimical  legislation,  or  from  other  causes.  Or  the 
other  hand,  where  the  average  principle  is  applied  to  a 
property  like  the  Rock  Island  or  the  Chicago  &  Alton, 
the  results  as  indicated  for  the  decade  average  somewhat 
above  the  figures  of  the  past  year  or  two,  and  when 
considered  by  themselves  it  might  be  thought  that  they 
would  be  rather  dangerous  guides  to  follow  in  judging  the 
security  values  or  the  general  position  of  the  road.  But 
the  average  principle  will  work  with  equal  force  when  a 
downward  trend  is  involved,  and  will  prevent  a  too  pes- 
simistic judgment  of  the  property.  If  the  road  has  been 
operating  a  decade  and  has  shown  some  years  of  good 
results,  followed  by  poorer  years,  it  does  not  necessarily 
mean  that  the  poorest  years  should  be  taken  as  the  basis 
for  permanent  values,  any  more  than  that  the  best  years 
should  be  used  as  the  basis  on  railroads  which  have 
shown  an  upward  trend. 

Of  course  the  application  of  this  10-y ear-average 
principle  is  to  be  taken  in  given  cases  with  proper  quali- 
fication, especially  when  extraordinary  or  unusual  condi- 
tions enter  in  to  affect  the  general  result.  Changes  in 
the  accounting  methods  within  the  past  few  years  have. 


Results  of  the  Decade  57 

to  some  extent  also,  varied  the  amounts  and  percentages 
for  single  years,  but  these  changes,  while  in  some  cases 
producing  a  sliglitly  inaccurate  comparison  between  the 
last  few  years,  have  had  little  effect  on  10-year-average 
results. 


VII 


Relative   Values   in   the   Railroad  —  The 
"Railroad-Mile" 

All  things  are  relative  and  must  be  measured  by  a  fixed 
standard.  This  is  just  as  true  in  considering  railroad 
results  as  in  considering  otlicr  things.  We  cannot  meas- 
ure or  compare  the  relative  worth  of  a  day's  work  and 
a  pair  of  shoes  except  by  measuring  both  according  to  a 
fixed  standard  of  value,  and  this  standard  we  call  money ; 
and  we  cannot  measure  the  relative  worth  of  a  given  piece 
of  railroad  property  or  a  given  amount  of  railroad  re- 
sults, except  by  means  of  a  fixed  standard  for  compari- 
son, and  this  standard  we  call  the  "railroad-mile."  To 
ascertain  intelligently  the  condition  and  earning  capacity 
of  a  railroad  system  we  must  consider  everything  in  re- 
lation to  the  length  of  line  operated,  and  measure  all  re- 
sults by  this  standard.  We  must  do  this  both  in  com- 
paring the  results  over  one  year  with  the  prior  year  or 
years,  and  also  in  comparing  the  results  shown  by  one 
property  with  the  results  sliown  by  another.  If  we  do  not 
do  this  any  examination  of  railroad  figures  or  railroad 
results  which  we  might  attempt  to  make  would  mean 
little  or  nothing,  and  would  lead  in  many  cases  to  per- 
fectly grotesque  conclusions. 


60  Introduction 


To  illustrate:  A  given  railroad  may  have  doubled 
its  equipment,  as  represented  by  the  number  of  engines 
and  cars  owned,  within  a  space  of  five  years,  and  this 
fact,  considered  without  relation  to  changes  in  the  mile- 
age figures,  would  lead  one  to  assume  that  the  volume  of 
business,  as  well  as  the  tangible  value  of  the  physical  prop- 
erty, had  shown  gratifying  growth  within  the  period. 
But  if  in  the  same  years  the  operated  main  track  mileage 
has  grown  in  equal  or  greater  proportion,  then  the  fact 
is  quite  apparent  that  the  volume  of  business  may  not 
have  grown  at  all,  and  the  actual  ownership  of  movable 
property,  as  represented  by  engines  and  cars,  may  not  be 
any  greater,  per  mile  of  road  operated,  than  was  the  case 
before.  The  same  principle  applies  to  all  figures  presented 
in  the  railroad  report.  Its  gross  business  may  double  in 
amount  of  money  in  five  or  ten  years,  but  if  the  mileage 
has  trebled  in  that  time,  then  the  traffic  of  the  road  is 
not  nearly  so  dense  as  it  was  at  the  beginning  of  the 
period.  Its  earning  capacity  is  declining.  But  if  we 
measure  the  gross  earnings  each  year  by  figuring  the 
amount  earned  per  mile,  we  then  get  an  accurate  scientific 
basis  for  comparison,  and  can  measure  the  figures  with 
those  of  other  properties  which  we  also  reduce  to  a  uni- 
form mileage  basis. 

The  same  idea  applies  with  equal  force  to  all  the  in- 
come records,  including  operating  and  maintenance  ex- 
penses, income  from  investments  and  other  sources,  fixed 
charges,  dividends  and  surplus.  And  when  we  come  to 
the  examination  of  questions  of  capitalization,  the  only 
measure  we  can  use  in  a  relative  and  comparative  way 


The  "Railroad-Mile"  r,\ 

is  that  of  the  length  of  line  operated.  The  application  of 
this  principle  to  all  parts  of  the  railroad  report  is  the 
only  sound  method  which  can  be  employed  for  analyzing 
the  roads  and  their  securities. 

But  while  all  exhibits  made  in  the  railroad  report 
can  be  intelligently  analyzed  by  methods  of  comparison 
with  like  properties,  the  fact  should  never  be  lost  sight 
of  that  many  qualifying  factors  are  constantly  entering 
in  which  must  be  given  due  weight.  Take  the  mainte- 
nance accounts,  for  example.  Two  properties,  operating 
in  generally  similar  territory,  and  transporting  similar 
types  of  traffic,  should,  other  things  being  equal,  spend 
about  the  same  proportion  of  their  gross  receipts  in  the 
up-keep  of  road  and  equipment.  But  it  may  be  that  in 
one  case  a  large  portion  of  the  mileage  is  new,  while  in 
the  other,  the  road  has  been  operating  its  entire  trackage 
for  many  years,  and  both  its  rails  and  equipment  have  had 
to  stand  the  test  of  wear  and  tear  to  their  limit.  It  is 
obvious,  in  such  a  case,  that  the  older  property,  for  this 
reason,  should  have  more  money  per  mile  spent  on  it  for 
its  general  maintenance  than  should  the  newer  road.  It 
is  often  noted  that  entirely  new  roads  operate  their  lines 
at  a  very  low  ratio,  and  they  are  sometimes  open  to 
severe  criticism  for  so  doing.  But  as  a  matter  of  fact, 
they  really  may  be  spending  even  more  for  essential  "up- 
keep" than  the  older  and  more  or  less  worn-out  prop- 
erties which  are  perhaps  disbursing  larger  amounts  in  the 
same  accounts.  In  time,  the  newer  property  may  have 
to  increase  its  maintenance  charges  to  the  average  at- 
tained by  the  older  road ;  but  it  is  no  real  evidence  that 


62  Introduction 


sufficient  amounts  are  not  being  spent  if  the  maintenance 
accounts  are  running  light  for  the  first  year  or  two  of 
operation. 

A  notable  instance  of  special  factors  working  for  a 
light  average  transportation  expense,  as  compared  with 
that  required  on  similar  systems,  is  shown  in  the  case  of 
the  Union  Pacific  main  lines.  For  years  the  Union  Pacific 
operated  its  lines  at  an  abnormally  low  ratio  as  compared 
with  roads  like  the  Atchison,  Missouri  Pacific,  Rock 
Island,  and  St.  Paul.  Many  are  disposed  to  take  the 
position  that  the  Union  Pacific  property  is  not  being 
properly  maintained,  and  that  the  heavy  net  earnings 
shown  in  recent  years  have  been  secured  largely  as  a 
result  of  allowing  the  physical  property  to  depreciate. 
But  a  moment's  consideration  of  the  matter  will  show 
that  there  are  special  reasons  of  sound  and  conclusive 
nature  for  the  relatively  low  maintenance  and  operating 
costs  on  the  Union  Pacific  main  lines. 

In  the  first  place,  the  geographical  position  of  the 
Union  Pacific  is  unusual.  Its  main  stem,  which  is  the 
great  traffic  carrier,  operates  from  Kansas  City  and 
Omaha  to  Ogden,  Utah.  At  the  former  points  it  con- 
nects with  a  large  number  of  systems  radiating  to  every 
part  of  the  North,  South,  and  East.  Traffic  concen- 
trates at  Omaha  and  Kansas  City  from  innumerable  lines 
entering  or  connecting  with  those  points.  The  Union 
Pacific  gathers  up  this  traffic  which  is  laid  at  its  feet,  and 
instead  of  the  vast  amount  of  transferring,  switching, 
etc.,  which  many  other  roads  are  obliged  to  employ,  in 
gathering   traffic    from    a    dozen    or   more    feeders,   the 


The  "Railroad-Mile"  63 

Union  Pacific  enjoys  the  great  economy  of  receiving  the 
bulk  of  its  through  business  at  these  great  central  points, 
and  is  thus  able  to  permanently  make  great  savings  in 
general  operating  costs,  which  many  other  roads  could 
not  do.  And  further  than  this,  at  its  Western  termmus 
the  conditions  are  very  much  the  same.  It  receives  the 
bulk  of  its  through  business  from  the  coast  at  Ogden, 
all  the  tonnage  of  the  Central  Pacific  and  the  Oregon 
lines  concentrating  at  that  point.  It  is  therefore  quite 
apparent  that  not  only  has  the  property  special  advan- 
tages for  keeping  down  its  general  operating  costs,  as 
compared  with  others,  but  because  of  this  ability  to  con- 
centrate the  handling  of  its  tonnage  the  wear  and  tear 
of  its  equipment  is  apt  to  be  far  less  severe. 

These  examples  are  cited  simply  to  emphasize  the 
importance  of  looking  below  mere  surface  figures  when 
examining  in  a  comparative  way  the  operating  or  other 
exhibits  of  the  railroad.  There  are  often  qualifying 
factors  of  equal  importance  in  the  financial  statements, 
and  here  also  it  is  always  necessary,  in  making  a  care- 
ful analysis  of  a  given  situation,  to  seek  below  the  sur- 
face for  any  special  causes  which  may  help  to  justify  or 
explain  unusual  differences  in  the  relative  showing 
made  by  a  given  road  as  compared  with  other  roads  of 
like  type,  when  the  surface  facts  do  not  definitely  ex- 
plain them. 

As  already  pointed  out,  the  three  chief  elements  in 
the  business  of  railroading  are  the  Physical  Factors,  the 
Income  Factors,  and  the  Capitalization  Factors.  These 
three  classes  of  characteristics  are  distinct  and  yet  they 


G4  Introduction 


are  all  related  and  interdependent,  and  all  come  in  for 
equal  consideration  in  any  analysis  of  a  railroad  report  or 
railroad  results.  We  will  now  take  up  and  examine 
these  three  groups  of  factors  in  their  proper  order. 


The  Physical  Factors 


VIII 

The  Physical  Factors 

Grouped  under  the  head  of  the  Physical  Factors  in 
the  business  of  railroad  operation  are  the  records  of 
Mileage  and  Equipment  as  well  as  other  figures  bearing 
on  the  physical  side  of  the  property.  Nearly  all  railroad 
reports  furnish  the  full  figures  necessary  for  making  a 
comparison  of  the  physical  factors.  Records  of  this 
nature  in  the  average  reports  made  to  stockholders  are 
not,  however,  always  arranged  in  such  form  that  the 
ordinary  investor,  not  familiar  with  accounting  principles, 
can  make  much  use  of  them.  Tabulations  presenting 
freight  or  passenger  traffic  statistics,  and  embracing 
such  items  as  "train  miles,"  "locomotive  miles,"  "train 
mileage  per  mile  of  road"  and  "average  number  of  pas- 
sengers per  train  or  engine  mile,"  have  little  or  no 
meaning  to  the  average  shareholder,  and,  as  far  as  he 
is  concerned,  he  apparently  feels  that  they  might  as 
well  have  been  left  out  of  the  report.  But  if  he  had 
some  method  for  placing  such  figures  in  proper  relation- 
ship to  the  other  things  in  the  report  which  he  can  under- 
stand, he  would  grasp  their  importance  and  meaning  at 
once.  And  if,  in  addition  to  this,  he  could  compare  these 
and   other   figures   shown    with    results   and    records   of 

(67) 


68  The  Physical  Factors 

previous  years,  he  would  quickly  find  that  the  railroad 
report,  instead  of  being  made  up  of  a  large  amount 
of  technical  matter  which  is  of  interest  to  railroad  man- 
agers only,  really  embraces  nearly  all  items  required  for 
making  quick  and  intelligent  comparative  deductions. 

But  even  when  investors  and  dealers  in  railroad  se- 
curities do  possess  the  knowledge  required  for  placing 
all  the  figures  in  the  reports  in  their  proper  relationships, 
and  are  fully  capable  of  making  sound  deductions,  it  is 
not  possible  for  many  to  secure  the  necessary  records 
more  than  a  year  or  two  back.  Railroad  reports  them- 
selves usually  get  out  of  print  after  a  year  or  so ;  the 
current  periodicals  seldom  publish  the  full  records, 
while  the  manuals  give  some  of  the  facts  but  not  all. 
The  records  of  the  Interstate  Commerce  Commission 
embrace  nearly  all  the  facts  that  are  necessary,  but  they 
are  not  presented  in  very  satisfactory  form  for  intelli- 
gent and  accurate  usage.  Therefore,  one  of  the  chief 
purposes  of  "Moody's  Analyses"  is  to  furnish  the  com- 
plete back  records  of  all  the  railroads  for  the  full  period 
of  a  decade ;  and  this  has  been  done  in  practically  every 
case  in  the  reviews  of  the  railroad  systems.  As  already 
stated,  the  deductions  finally  made  for  showing  the  posi- 
tion and  value  of  the  different  security  issues  are  all 
based  on  the  average  results  of  the  decade  closing  with 
the  latest  fiscal  year. 


IX 

Average  Miles  Operated 

This  is  the  "yard-stick"  by  which  everything  is  meas- 
ured, and  indicates  the  length  of  hne  operated  by  the 
company  during  the  given  year.  "Average  miles  oper- 
ated" does  not  include  second,  third  or  fourth  track, 
nor  any  mileage  controlled  but  not  directly  operated. 
The  true  figures  given  on  which  results  apply  are  the 
operations  or  earnings  of  directly  operated  lines  alone; 
that  is,  the  results  of  lines  which  figure  in  the  income 
accounts  of  the  company.  They  often  include  the  results 
of  a  leased  or  controlled  line,  but  only  where  the  leased  or 
controlled  line  is  directly  operated ;  and  in  this  case 
the  mileage  of  the  leased  or  controlled  line  is  always 
included  in  the  report  in  the  "average  mileage  operated" 
of  the  main  system.  Where  such  mileage  is  separately 
operated,  a  separate  analysis  is  of  course  necessary. 
For  example,  in  the  case  of  the  Reading  Company  sys- 
tem, an  entirely  distinct  report  is  furnished  by  the  Cen- 
tral Railroad  of  New  Jersey,  which  is  the  leading  sep- 
arately operated  controlled   line. 

It  might  be  assumed  that  a  better  comparison  could 
be  made  on  the  basis  of  lcns;th  of  trnck  rather  than 
length  of  line.     That  is  to  say,  while  all  railroads  have 

(6») 


70  The  Physical  Factors 

some   extra   tracks,    such    as   second,   third   and    fourth 
tracks,  yet  it  may  seem  that  a  comparison  of  two  roads, 
one  of  which  is  90  per  cent  single  track  and  the  other 
only    50    per   cent    single   track,   would    be    misleading. 
And  it  would,  if  the  fact  of  the  extra  track  or  propor- 
tion of  extra  track  were  not  taken  into  consideration. 
But  it  will  be  realized  that  to  work  out  all  the  compara- 
tive figures  on  the  basis  of  length  of  track  would  lead 
to  very  inequitable  comparisons   and  grotesque  results. 
Extra  main  track  on  a  railroad  does  not  in  any  case 
reflect  the  same  earning  capacity  as  the  first  track.     A 
second  track  on  an  ordinary  railroad  line  in  the  Eastern 
states  might  perhaps  add  from  30  to  50  per  cent  to 
the  possible  capacity,  but  it   would   in  no  case   double 
the  capacity.     Therefore,  length  of  line  in  second  track 
is  not  of  the  same  relative  significance  as  length  of  line 
in  first  track.     The  New  York  Central  has  a  large  per- 
centage of  extra  main  track,  a  substantial  proportion  of 
its  main  line  being  equipped  with  from  three  to   four 
tracks.     On   the  other  hand,   the  Erie   Railroad  has   a 
lesser  percentage  of  extra  main  track  and  a  portion  of 
its  main  line  through  to  Chicago  is  single  track.     Yet 
the  density  of  freight  business  on  the  main  lines  of  the 
Erie,  as  shown  by  the  records,  is  practically  equal  to 
that  of  the  New  York  Central.    While  extra  main  track 
is  a  factor  of  importance  it  cannot  be  used  as  a  mileage 
basis  for  a  fair  comparison. 

At  the  same  time  the  existence  of  all  extra  main 
track  and  its  length  must  be  considered  in  any  com- 
parative examination   of   railroad   results,   and  in   most 


Average  Miles  Operated  71 

railroad  reports  a  statement  of  extra  main  track, 
wherever  it  exists,  is  furnished  with  the  record  of 
miles  operated  of  main  track  each  year.  These  two 
sets  of  figures  thus  show  the  investor  the  proportion 
of  the  average  mileage  which  is  equipped  with  more 
than  one  track,  and,  of  course,  back  records  reveal 
the  trend  of  improvement  in  that  direction.  Where 
extra  main  track  is  increasing  in  greater  ratio  than  the 
main  track  mileage,  it  is  an  indication  that  the  capacity 
of  the  road  for  handling  its  business  has  been  increased 
and  that  its  volume  of  business  in  general  terms  should 
be  growing.  As  an  illustration  of  this,  an  examination 
of  the  Illinois  Central  reports  in  recent  years  is  worth 
making.  During  the  decade  the  average  mileage  operated 
(length  of  line)  of  the  Illinois  Central  system  has  in- 
creased from  4,276  miles  to  4,563  miles,  an  increase  of 
about  6  per  cent.  During  the  same  period  its  extra 
main  track  has  grown  from  535  miles  as  reported  in 
1902  to  792  miles  in  1911,  an  increase  of  nearly  50  per 
cent.  All  of  this  increase  has  not,  of  course,  been  second 
track,  some  being  third  or  perhaps  fourth  track.  But 
every  extra  track  .which  is  main  track  mileage — that  is 
to  say,  not  switches,  yard  tracks,  or  sidings — is  always 
classed  as  extra  main  track. 

As  will  be  seen  by  a  general  examination  of  railroad 
reports,  very  few  railroads  in  the  United  States  can 
boast  of  extra  main  track  up  to  50  per  cent  of  their 
length  of  lines.  Systems  like  the  New  York  Central, 
the  Pennsylvania,  and  New  Haven  report  more  than  50 
per  cent  in  extra  main  track,  but  it  must  be  remembered 


72  The  Physical  Factors 

that  a  proportion  of  this  is  represented  by  third  and 
fourth  tracks  and  that,  therefore,  a  very  substantial  part 
of  the  system  is  equipped  with  one  track  only.  In  the 
Western  States  most  of  the  railroads  are  almost  entirely 
single  track,  even  a  property  like  the  Burlington  report- 
ing extra  main  track  equal  to  only  8  per  cent  of  its  oper- 
ated mileage  and  the  Atchison  reporting  only  about  6  per 
cent.  The  Missouri  Pacific  reports  for  1911  only  171 
miles  of  extra  main  track  on  its  entire  system*  of  7,235 
miles,  while  the  Kansas  City  Southern,  with  827  miles 
operated  in  1911,  reported  but  14  miles  of  extra  main 
track.  The  Iowa  Central  reported  no  extra  main  track 
whatever,  nor  did  the  Missouri,  Kansas  &  Texas  system. 
In  nearly  all  railroad  reports  the  miles  of  yard  tracks 
and  sidings  for  the  latest  fiscal  year  are  also  stated, 
thus  enabling  the  investor  to  get  a  complete  general  idea, 
not  only  of  the  length  of  the  line  and  the  trend  of 
growth  in  length  of  line  for  the  decade,  but  also  the 
density  of  growth  which  is  reflected  by  increase  in  extra 
main  track,  and  in  addition  to  get  some  conception  of 
the  amount  of  mileage  embraced  in  terminals,  switches, 
etc.  Having  these  general  facts  before  him  and  com- 
paring the  figures  as  shown  in  the  reports  with  the  aver- 
age mileage  and  extra  main  track  figures  of  other  prop- 
erties similarly  located,  he  will  be  in  a  position  to  make  an 
intelligent  comparison.  For  example,  the  relative  dif- 
ference will  be  seen  at  a  glance  between  the  mileage  of 
the  St.  Paul  and  the  mileage  of  the  Chicago  &  North 
Western.  For  the  year  1911  the  average  mileage  directly 
operated  on  the  St.  Paul  was  7,512  miles,  and  the  extra 


Average  Miles  Operated  73 

main  track  average  627  miles,  while  on  the  Chicago  & 
North  Western  7,719  miles  of  average  main  trackage 
were  operated  with  1,027  miles  of  extra  main  track,  show- 
ing at  once  that  the  North  Western  is  equipped  with  a 
much  higher  percentage  of  extra  main  tracks  than  is 
the  St.  Paul.  The  same  test  applied  to  the  Burlinc^ton 
would  show  that  whereas  the  Burlington  main  track  mile- 
age averaged  9,072  miles  for  1911,  the  extra  main  track 
averaged  but  684  miles,  a  lower  percentage  in  relation 
to  the  total  length  of  line  than  that  reported  by  the  St. 
Paul. 

Other  facts  of  value  in  connection  with  the  trackage 
of  the  railroads,  into  which,  however,  it  is  not  deemed 
necessary  to  study  in  such  full  detail,  relate  to  such 
matters  as  the  character  of  grades  and  bridge  construc- 
tion, weight  of  rails,  etc.  Many  of  the  large  systems 
during  the  past  ten  or  fifteen  years  have  been  replacing 
their  lighter  rails  with  steel  rails  of  much  heavier  weight 
and,  therefore,  greater  capacity.  But  these  items  are  not 
of  the  same  importance  as  was  the  case  twenty-five  to 
thirty  years  ago  when  the  railroads  were  changing  from 
old,  light-weight  iron  rails  averaging  40  lbs.  to  the  yard, 
to  steel  rails  averaging  60  lbs.  Most  well-equipped  rail- 
roads nowadays  use  rails  averaging  from  65  to  100  lbs., 
and  the  Eastern  systems  and  trunk  lines  especially  are 
all  equipped  with  this  character  of  rail.  On  the  New- 
York  Central  and  Pennsylvania  main  lines  the  rails  aver- 
age from  90  to  120  lbs.,  this  heavy  weight  being  neces- 
sary for  the  heavy  cars  and  engines,  increased  freight 
density,  and   larger  trainloads.      For   branch    lines   and 


74  The  Physical  Factors 

feeders  and  light  carriers  a  rail  averaging  from  55  to 
70  lbs.  is  practically  as  serviceable.  Nearly  all  annual 
reports  of  railroads  furnish  figures  showing  the  average 
weight  of  rails  on  their  lines,  and  in  some  cases  they 
show  the  life  of  the  rails,  generally  indicating  their  con- 
dition, etc. 

So  much  for  the  trackage  figures,  which,  as  repre- 
sented by  mileage  operated,  as  already  stated,  should  be 
the  basis  for  working  out  all  the  comparisons  and  making 
all  the  deductions  in  this  particular  field. 


Equipment 

The  equipment  of  a  railroad  consists  of  its  movable 
property,  that  is  to  say,  its  engines  and  cars.  Equipment 
as  understood  in  railroad  reports  does  not  include  such 
property  as  buildings,  stations  or  other  structures.  It 
does  include  floating  equipment,  such  as  boats,  tugs,  etc., 
where  a  road  has  use  for  such,  but  as  instances  are  rare 
where  floating  equipment  is  relatively  important,  the 
equipment  question  resolves  itself  almost  wholly  into  the 
field  of  locomotives  and  passenger  and  freight  cars.  Just 
as  it  is  important  to  know  something  about  a  railroad's 
location,  its  character  of  traffic  and  its  length  of  lines, 
so  it  is  important  to  have  at  hand  full  facts  regarding 
its  actual,  movable  property.  In  fact,  the  equipment 
is  the  machinery  with  which  it  does  its  business ;  it  is  con- 
stantly in  motion,  subject  to  endless  wear  and  tear,  and 
requires  constant  replacement.  Every  railroad  report 
which  is  properly  constructed  furnishes  a  full  statement 
of  equipment,  showing  not  only  the  number  of  engines 
owned,  but  usually  the  weight  and  tractive  power  of 
these  engines  and  often  their  age,  and  also  the  number 
of  engines  destroyed  or  displaced  from  service  within  tlie 
year  and  the  number  of  new  engines  acquired.    The  total 

(75) 


76  The  Physical  Factors 

number  of  engines  shown  in  use  for  the  year  is  the  net 
number  after  adding  the  new  engines  and  deducting  those 
destroyed  or  worn  out.  The  same  plan  is  followed  in 
statements  of  passenger  and  freight  equipment  as  well 
as  company  cars.  The  term  "company  cars"  signifies 
those  cars  used  for  company  work  and  includes  dirt  cars, 
derricks,  cabooses,  etc.  Company  cars  are  separately 
classified,  as  they  are  not  supposed  to  be  direct  revenue 
producers.  On  representative  systems  the  company  cars 
usually  equal  about  3  per  cent  of  the  total  number  of 
freight  cars  owned  by  the  Company. 

It  is  sometimes  the  custom  in  making  up  analyses 
of  railroad  reports  to  reduce  the  number  of  engines  and 
cars  to  a  mileage  basis  just  as  the  earnings  are  so 
reduced.  That  is  to  say,  in  addition  to  noting  that  the 
St.  Paul  owned,  in  1911,  1,244  engines,  we  would  divide 
that  number  of  engines  by  the  mileage  operated  and 
thus  ascertain  the  number  of  engines  per  mile  or  the 
proportion  of  an  engine  per  mile.  But  this  method  of 
statement  is  extremely  technical,  it  involves  the  intro- 
duction of  close  fractions,  and  for  ordinary  analytical 
purposes  is  not  necessary.  Therefore,  the  method  is 
usually  followed  of  ascertaining  for  each  year  the  actual 
number  of  engines  and  cars  owned  or  controlled.  As  the 
mileage  figures  are  quickly  ascertained  and  compared, 
the  relative  significance  of  the  equipment  and  the  mileage 
can  in  all  cases  be  readily  seen.  It  should  be  explained 
also  that  the  statements  of  equipment  given  in  reports 
in  nearly  all  cases  classify  separately  equipment  owned 
in  fee  and  that  embraced  in  equipment  trusts.     Many 


Equipment  77 

railroads  follow  the  plan  of  "trusteeing"  the  equipment 
they  buy  from  year  to  year,  and  paying  ofif  the  obliga- 
tions out  of  earnings  as  the  equipment  is  being  used. 
In  this  way,  by  the  time  the  equipment  is  worn  out  or 
by  the  time  substantial  amounts  have  been  spent  on  it 
for  its  maintenance,  it  is  entirely  paid  for  out  of  earn- 
ings, and  is  then  owned  in  fee  without  having  involved 
the  creation  of  any  permanent  capital  obligations  for  its 
purchase.  It  is  sometimes  assumed  that  only  those  rail- 
roads which  have  poor  credit  follow  the  equipment  or  car 
trust  idea.  But  this  is  not  true,  as  many  roads  of  very 
high  credit,  such  as  the  Pennsylvania,  purchase  all  their 
equipment  in  this  way,  and  pay  for  it  serially  out  of 
the  operating  results  of  the  equipment  itself.  The 
payments  from  year  to  year  on  "trusteed"  equipment 
are  usually  included  in  the  fixed  charges,  or  at  least 
are  deducted  from  the  profit  and  loss  accounts,  and  in 
the  statements  of  capitalization  the  equipment  issues 
are  included  as  liabilities  with  the  bond  issues.. 

A  comparative  record  of  engines  and  cars  extending 
over  a  series  of  years  is  of  special  value  in  indicating 
the  growth  of  the  business  of  the  company  and  also  its 
increase  or  decrease  in  the  possession  of  movable  prop- 
erty. Practically  all  American  railroads  have  shown  de- 
cided increases  in  these  items  during  the  past  ten  years, 
and  it  is  only  here  and  there  that  a  road  has  reported 
an  actual  decline  in  quantity  of  equipment  owned.  The 
back  figures  are  of  value  for  comparative  purposes  for 
the  different  years  and  also  for  comparing  one  railroad 
system  with  another.     For  example,   in  comparing  the 


78  The  Physical  Factors 

St.  Paul  with  the  Burlington,  we  find  that,  as  related  to 
mileage,  the  equipment  figures  are  very  much  the  same, 
and  the  trend  over  a  ten  year  period  has  been  decidedly 
similar.  But  if  we  compare  the  directly  operated  lines 
of  the  New  York  Central  with  those  of  the  Pennsyl- 
vania Railroad  we  find  that  on  mileage  averaging  much 
the  same  during  the  decade  the  locomotive  equipment  of 
the  New  York  Central  averaged  much  less  than  that  of 
the  Pennsylvania.  This,  of  course,  indicates  at  once  that 
the  Pennsylvania  Railroad  has  uses  for  a  far  greater 
number  of  locomotives  for  the  carrying  on  of  its  business 
than  has  the  New  York  Central.  In  passenger  cars  we 
find  that  the  average  figures  of  the  two  systems  for  the 
decade  are  almost  the  same,  while  in  freight  equipment 
the  New  York  Central  reports  an  average  of  67,114 
cars  while  the  Pennsylvania  reported  an  average  for  the 
decade  of  cars  owned  amounting  to  62,359.  In  the  case  of 
the  Pennsylvania,  however  there  are  a  large  number  of 
freight  cars  held  under  equipment  trusts,  making  the 
total  freight  equipment  available  for  service  at  the  close 
of  1910,  139,680  cars,  thus  showing  that  at  the  end  of 
1910  the  total  number  of  freight  cars  used  on  the  Penn- 
sylvania Railroad's  directly  operated  lines  was  about 
double  the  number  used  by  the  New  York  Central. 
An  enormously  greater  volume  of  business  is  reflected  in 
the  Pennsylvania  equipment  figures  as  compared  with 
those  of  the  New  York  Central. 

In  examining  comparative  statements  of  equipment 
figures,  several  qualifying  factors  should  be  kept  in  mind. 
For  example,  while  an  increase  in  the  number  of  engines 


Equipment  79 

owned  from  year  to  year  implies  the  growth  of  locomo- 
tive equipment,  it  is  not  an  entirely  accurate  guide  for 
the  reason  that  the  capacity  of  locomotives  has  changed 
to  a  marked  extent  during  the  past  ten  years.  For 
instance,  the  average  weight  of  the  locomotives  used 
on  the  Union  Pacific  system  in  1901  was  about  55  tons, 
while  those  being  used  to-day  measure  up  in  most  cases 
to  as  much  as  83  tons,  thus  showing  an  increase  in 
capacity  for  locomotives  equal  to  perhaps  50  per  cent 
over  the  conditions  of  ten  years  ago.  The  same  facts 
apply  to  more  or  less  extent  in  freight  equipment.  The 
introduction  of  the  pressed  steel  car  and  the  modern 
freight  car  of  large  capacity  has  resulted  in  displacing 
thousands  of  light-weight,  small-capacity  cars  such  as 
were  used  a  decade  or  more  ago.  Thus  in  many  cases 
where  an  increase  is  shown  of  25  per  cent  in  the  quan- 
tity of  freight  cars  during  the  decade,  it  may  easily  be 
that  the  average  capacity  of  the  freight  equipment  has 
increased  far  more  than  25  per  cent.  For  example,  if 
we  examine  the  coal-carrying  roads,  such  as  the  New 
Jersey  Central,  the  freight  equipment  figures  should  es- 
pecially be  considered  with  this  fact  in  view.  A  large 
part  of  the  New  Jersey  Central  freight  equipment  con- 
sists of  coal  cars,  and  prior  to  1904  many  thousands 
of  these  cars  were  the  old-fashioned  four-wheel  boxes 
with  a  capacity  of  about  ten  tons  of  coal  each.  But 
these  were  rapidly  replaced  after  1903  with  pressed  steel 
cars  of  a  capacity  several  times  greater,  and,  of 
course,  the  quantity  of  individual  cars  owned  naturally 
declined.     But  the  general   business   of   the    New   Jer- 


80  The  Physical  Factors 

sey  Central  grew  so  rapidly  during  this  period,  that  the 
actual  decline  in  number  of  cars  owned  was  very  small, 
and  in  1911  the  company  reported  a  larger  number  of 
freight  and  company  cars  than  it  reported  in  1904,  just 
before  the  rapid  replacement  began. 

The  same  facts  should  be  borne  in  mind  in  relation 
to  passenger  equipment.  The  replacement  which  is 
constantly  going  on  results  each  time,  in  progressive  rail- 
road systems,  in  cars  of  better  construction  and  larger 
capacity  taking  the  place  of  those  displaced,  so  that  the 
mere  quantity  in  itself  is  not  a  complete  guide  in 
the  matter.  As  in  the  case  of  locomotive  equipment, 
most  good  railroad  reports  give  details  regarding  the 
tonnage  capacity  of  freight  equipment  and  the  general 
character  of  passenger  equipment 


XI 

Proportion  of  Freight  to  all  Traffic 

It  is  important  to  know,  in  examining  a  railroad  re- 
port, what  proportion  of  the  business  done  is  represented 
by  the  freight  and  what  proportion  by  passengers  or  re- 
ceipts from  other  kinds  of  transportation.  As  a  whole, 
American  railroads  report  an  average  of  about  30  per 
cent  in  passenger  traffic,  the  remaining  70  per  cent 
being  made  up  of  freight,  expressage,  mail  matter,  etc. 
Eastern  roads,  as  a  rule,  report  a  larger  proportion  of 
passenger  traffic  than  tiiose  in  the  West  and  South,  and 
as  a  matter  of  fact,  there  is  a  fairly  wide  variation  be- 
tween the  percentages  on  the  various  railroad  systems 
even  when  located  in  the  same  territory.  For  example, 
while  the  percentage  of  freight  to  all  traffic  on  the  Penn- 
sylvania Railroad  has  averaged  for  the  past  decade  IZ 
per  cent,  on  the  New  York  Central  it  averaged  only  59 
per  cent.  On  the  Norfolk  &  Western  it  averaged  84 
per  cent,  while  on  the  Baltimore  &  Ohio  it  averaged  76 
per  cent.  The  Delaware  &  Hudson  reported  an  average 
of  80  per  cent,  but  the  Delaware,  Lackawanna  &  West- 
ern average  was  but  73  per  cent.  Going  further  west 
we  find  that  while  the  percentage  on  the  Chicago  & 
North  Western  was  70  per  cent,  on  the  Illinois  Central 

(81) 


82  The  Physical  Factors 

it  was  but  67  per  cent.  The  Hocking  Valley  business 
was  80  per  cent  freight  traffic,  while  that  of  the  Pitts- 
burg &  Lake  Erie  was  90  per  cent.  In  the  East,  the 
New  Haven,  which  depends  chiefly  on  passenger  busi- 
ness, reported  an  average  of  only  50  per  cent  for  freight, 
while  the  Long  Island  Railroad,  the  traffic  of  which  is 
confined  to  a  very  limited  area,  reported  a  freight  per- 
centage averaging  but  28  per  cent  of  the  whole. 

The  value  of  this  record  showing  the  proportion  of 
freight  to  all  traffic  is  two-fold.     First,  it  indicates  the 
character  of  traffic  which  is  of  most  importance  to  the 
railroad  and  which  is  the  source  of  most  of  its  income, 
thus  enabling  the  person  examining  the  record  to  know 
the  significance  of  changes  in  the  freight  or  passenger 
rates  and  also  when  examining  the  operating  records  to 
properly  judge  the  maintenance  and  operating  costs.     In 
addition  to  this,  a  10-year  comparative  record  shows  at  a 
glance  any  changing  trend  which  may  be  going  on  in  the 
character  of  the  traffic.     It  is  important  to  know,   for 
example,   that   the   Pennsylvania    Railroad    reported    73 
per  cent  of  its  business  as  freight  in  1901,  while  in  1910 
the  proportion  was  up  to  75  per  cent.     On  the  Kansas 
City  Southern  we  find  that  in   1902  the  proportion  of 
freight  was  82  per  cent  and  that  during  the  decade  there 
was  a  moderate  downward  trend  resulting  in  an  average 
in  1911  of  7Z  per  cent.     This  average  shows  that  the 
Kansas  City  Southern  Railway  now  relies  more  on  its 
passenger  business  than  it  did  ten  years  ago. 


XII 

Passenger  and  Freight  Density 

Every  complete  railroad  report  contains  statements 
showing  the  number  of  passengers  carried  during  the 
year,  the  number  of  passengers  carried  one  mile,  the 
average  number  of  passengers  carried,  and  various  other 
records  of  the  same  nature.  Under  "freight  traffic  sta- 
tistics" figures  are  also  generally  furnished  of  the  num- 
ber of  tons  carried  during  the  year,  with  the  number 
of  tons  carried  one  mile.  As  a  general  thing,  entirely 
too  little  attention  is  given  to  these  figures  by  the  average 
shareholder  when  examining  his  report.  The  relation- 
ship of  these  figures  to  the  general  earning  capacity  of 
the  property  is  not  appreciated  or  understood  and,  there- 
fore, these  operating  records  are  passed  by  without 
examination  or  analysis. 

It  would  be  well  if  traffic  statistics  of  this  kind  were 
presented  in  more  intelligible  form  and  if  comparative 
records  were  shown  extending  over  a  series  of  years. 
The  chief  value  of  these  figures  to  the  investor  is  that 
by  means  of  them  he  can  ascertain  the  relative  volume 
of  business  being  done  by  the  railroad  in  both  passengers 
and  freight  and,  if  he  has  the  complete  records  at  hand. 
can  make  comparisons  both  with  the  records  shown  in 

(83) 


84  The  Physical  Factors 

previous  years  and  also  with  the  records  made  by  prop- 
erties of  similar  type  and  operating  in  similar  territory. 
But  the  average  investor  does  not  have  at  hand  a  series 
of  reports  covering  a  term  of  years,  and  therefore  cannot 
readily  make  an  intelligent  use  of  the  figures.  As  a 
matter  of  fact,  these  traffic  figures  are  not  amenable  to 
comparison  unless  reduced  to  the  mileage  basis  just  as 
all  other  operating  records  must  be.  For  example,  an 
investor  examining  the  Baltimore  ,&  Ohio  annual  report 
for  the  year  ending  June  30,  1911,  will  find  it  stated 
under  the  head  of  "passenger  traffic  statistics"  that  the 
number  of  passengers  carried  during  the  year  was  21,- 
969,166,  and  that  this  was  an  increase  of  862,046  as 
compared  with  the  previous  year,  a  growth  in  number 
of  about  4  per  cent.  Following  this  he  will  find  that 
the  number  of  passengers  carried  one  mile  is  given  as 
795,884,886.  He  will  then  find  it  stated  that  the  number 
of  passengers  carried  one  mile  per  mile  of  road  was 
179,506.  Passing  to  the  freight  traffic  statistics,  he  will 
find  a  record  of  the  same  kind  in  relation  to  the  tons 
carried,  the  number  of  tons  carried  being  60,547,887,  the 
number  of  tons  carried  one  mile,  11,703,539,445,  and 
the  number  of  tons  carried  one  mile  per  mile  of  road, 
he  will  find  stated  as  2,639,634,  which  is  shown  to  be  a 
decrease  of  about  3  per  cent,  as  compared  with  the  figures 
of  the  previous  year. 

As  no  other  records  are  given  in   relation  to  these 
figures  to  indicate  to  the  investor  just  what  their  in- 


Passenger  and  Freight  Density  85 

telligent  use  may  be,  it  is  quite  natural  that  their  signifi- 
cance is  not  appreciated.* 

Generally  speaking,  if  a  railroad  is  increasing  its 
gross  revenue  per  mile,  its  passenger  and  freight  density 
will  show  an  upward  trend.  This  will  not  always  fol- 
low, however,  as  it  may  be  that  for  special  reasons  the 
property  will  be  comparatively  a  light  carrier  of  pas- 
sengers or  freight,  and  without  increasing  the  7'olume  of 
its  business  per  mile,  it  may  increase  its  gross  receipts. 
But,  as  a  rule,  the  trend  in  the  density  should  be  upward, 
and  it  generally  will  be  upward,  as  the  operating  effi- 
ciency of  the  property  improves.  An  illustration  of  the 
results  shown  (on  the  average)  by  the  Pennsylvania  and 
the  New  York  Central  in  freight  density  for  the  past 
decade,  will  be  worth  considering.  With  average  ope- 
rated mileage  only  about  6  per  cent  less,  and  with  gross 
earnings  per  mile  averaging  for  the  New  York  Central 
about  34  per  cent  less  than  they  have  averaged  for  the 
Pennsylvania,  we  at  the  same  time  find  that  the  freight 
density  on  the  Pennsylvania  has  averaged  nearly  90  per 
cent  heavier  during  the  decade  than  it  has  on  the  New 
York  Central.  To  present  the  e.xact  figures,  the  Penn- 
sylvania  reported  an  average  density  of  4,395,162,  and 


•  It  is  one  of  the  main  purposes  of  "Moody's  Analyses"  to  enable 
the  investor  to  employ  these  figures  simply  and  intcUiRently  in  the  use 
for  which  they  are  intended.  In  the  table  of  Physical  Factors  in  eacli 
analysis  the  figures  showing  passenger  density  and  fnight  density  arc- 
presented  for  each  year  of  the  decade,  with  the  10-ycar  averages  and 
comparisons  complete.  "Passenger  density"  is  simply  an  abbreviated  term 
for  the  figure  showing  the  number  of  passengers  carried  one  mile  per  mile 
of  road.  Its  value  is  relative  purely  and  it  shows  concisely  the  volume 
of  passenger  business  done,  and  the  increase  or  decrease  from  year  to 
year,  thus  indicating  the  upward  or  downward  trend  as  the  case  may  be. 
When  compared  with  other  properties  it  indicates  which  roads  are  doing 
a  heavier  relative  passenger  business.  Exactly  the  same  principles  apply 
to   tie    figures    showing    "freight    density." 


86  The  Physical  Factors 

the  New  York  Central,  2,322,263.  The  significance  in 
this  comparative  showing  is,  that  the  Pennsylvania  ope- 
rates more  and  heavier  trains,  carries  more  tonnage  on 
these  trains,  moves  a  less  proportion  of  empty  or  half- 
filled  cars,  and  altogether  gets  a  good  deal  more  work 
out  of  its  operations  than  does  the  New  York  Central. 
The  passenger  business  on  the  New  York  Central,  how- 
ever, makes  a  showing  superior  to  that  of  the  Penn- 
sylvania, the  density  on  the  former  being  considerably 
heavier.  But  the  New  York  Central  relies  to  less  ex- 
tent on  freight  business  than  does  the  Pennsylvania. 

As  already  pointed  out  in  the  earlier  pages,  the  sig- 
nificant and  vital  question  back  of  the  earning  power 
of  a  railroad,  and  therefore  back  of  its  securities,  is 
the  intensive  development  of  the  operating  side  of  the 
property.  The  density  figures  bring  the  condition  of 
this  development  out  very  strongly,  and  when  exam- 
ined in  connection  with  the  showing  made  in  gross 
revenue,  in  maintenance  expenditures  and  in  net  re- 
ceipts, they  take  on  much  importance.  When  we  take 
up  the  discussion  of  the  Income  Factors  of  railroads,  we 
will  note  the  close  relationship  between  income  items 
and  the  density  figures.  Briefly,  the  more  work  that 
can  be  gotten  out  of  a  given  mile  of  railroad  operation, 
as  figured  on  the  average,  the  more  satisfactory  is  apt 
to  be  the  income  account  of  the  property. 

During  the  past  decade  the  great  majority  of  Ameri- 
can railroads  have  reported  steady  increases  in  traffic 
density,  thus  reflecting  concisely  the  steadily  growing 
traffic   of  American   railroads.     But   there   has   been 


Passenger  and  Freight  Density  87 

a  wide  divergence  in  this  general  trend,  some  properties 
showing  density  increases  far  more  rapidly  than  others, 
while  as  considered  in  relation  to  the  trend  of  gross 
receipts  per  mile,  we  will  find  still  other  differences  of 
great  significance.  Some  roads,  like  the  Lackawanna, 
which  have  reported  no  important  mileage  increases  dur- 
ing the  decade,  have  shown  an  actual  doubling  of  both 
passenger  and  freight  density,  while  others  with  mileage 
increases  running  as  high  as  100  per  cent,  have  also 
reported  equally  great  proportionate  increases  in  the 
traffic  density.  It  will  be  realized  that  if  a  railroad  is 
increasing  its  mileage  every  year  and  at  the  same  time 
increasing  its  traffic  density  in  greater  ratio  (which  is 
simply  the  number  of  tons  carried  one  mile  per  mile 
of  road),  it  is  making  greater  progress  relatively  than 
when  it  is  not  increasing  its  mileage  each  year.  The 
Atchison  system  has  made  a  very  strong  record  during 
the  decade,  both  in  the  matter  of  mileage  growth  and 
in  traffic  density  increase.  With  a  mileage  growth  of 
32  per  cent,  since  1902,  it  reports  a  freight  density  in- 
crease of  almost  25  per  cent  and  a  passenger  density  in- 
crease of  over  60  per  cent.  The  Atlantic  Coast  Line 
Railroad,  with  a  mileage  at  the  end  of  the  decade  over 
160  per  cent  greater  than  at  the  beginning,  reported  a 
freight  density  growth  of  60  per  cent,  and  a  passenger 
density  growth  of  70  per  cent.  On  the  other  hand,  we 
find  that  the  Baltimore  &  Ohio,  while  reporting  a  mileage 
increase  of  great  extent,  shows  only  a  moderate  growth 
in  density.  While  these  figures  on  the  Baltimore  & 
Ohio  do  not  imply  that  the  road  has  not  been  efficiently 


88  The  Physical  Factors 

operated,  they  do  mean  that  the  chief  hope  of  the  Balti- 
more ,&  Ohio  during  the  past  decade,  in  the  direction  of 
increased  profits,  has  been  bound  up  more  directly  with 
the  question  of  stable  freight  rates.  The  average  totals 
of  freight  density  on  the  Baltimore  &  Ohio  were  heavy 
at  the  beginning  of  the  decade,  and  in  comparison  with 
other  properties  doing  a  larger  gross  business  in  dollars, 
they  have  always  been  surprisingly  good.  Comparison 
with  a  property  like  the  New  York  Central  brings  this 
fact  at  once  to  the  front.  If  we  examine  the  freight 
density  figures  of  the  Hocking  Valley,  however,  we  will 
note  that  there  has  been  an  increase  in  the  decade  of 
nearly  40  per  cent  and  that  the  average  figures  of  recent 
years  have  been  at  least  40  per  cent  higher  than  those 
of  the  Baltimore  &  Ohio,  although  the  figures  ten  years 
ago  were  only  about  10  per  cent  higher  than  the  figures 
shown  at  that  time  by  the  Baltimore  &  Ohio.  The  mean- 
ing of  this  comparative  record  simply  is  that  the  tonnage 
of  the  Baltimore  &  Ohio,  at  the  beginning  of  the  decade, 
had  already  been  developed  to  practically  its  full  capacity, 
while  that  of  the  Hocking  Valley  had  not.  To-day  the 
Hocking  Valley  has  apparently  reached  nearly  its  highest 
development  in  tonnage  and,  other  things  being  equal, 
will  probably  not  show  during  the  coming  decade  any 
pronounced  upward  trend  in  this  respect. 


XIII 

Average  Freight  Train-load 

Most  railroad  reports  present  figures  showing  the 
train-load  for  the  year,  but  many  do  not.  However,  they 
all  furnish  other  figures  by  which  the  investor  can  very 
easily  ascertain  the  train-load.  The  "train-load"  indicates 
the  number  of  totts  of  revenue  freight  carried  on  the 
average  on  each  train  operated  per  mile,  and  its  great 
value  is  in  its  indication  of  the  efficiency  or  non-efficiency 
of  the  operating  methods  of  the  property.  If  the  train- 
load  of  a  railroad  is  increasing  it  usually  means  that 
its  volume  of  business  is  growing,  that  it  is  carrying 
less  half-filled  cars,  and  therefore  generally  doing  its 
work  more  profitably.  The  train-load  is  ascertained  by 
dividing  the  number  of  tons  of  freight  carried  one  mile, 
by  the  freight-train  mileage.  Each  report  presents  the 
figures  of  the  latter,  which  are  the  aggregate  number 
of  miles  run  during  the  year  by  all  freight  trains  which 
have  been  operated  for  revenue. 

There  is  great  variation  in  the  train-load  of  railroads 
in  the  different  parts  of  the  country,  and  the  size  of  the 
train-load  has  direct  relation  to  the  clieracter  of  tonnage 
carried.  The  coal-carrying  roads,  which  operate  at  low 
cost  and  receive  very  low  freight  rates  and  must,  there- 

(89) 


90  The  Physical  Factors 

fore,  run  extremely  heavy  and  long  trains,  generally  show 
a  far  heavier  train-load  than  those  which  carry  higher 
grade  tonnage.  To  illustrate,  the  New  Haven  road,  which 
does  chiefly  a  "high-grade'  freight  business,  reports  an 
average  train-load  for  1911  of  but  290  tons,  while  the 
Pennsylvania,  with  its  tonnage  made  up  to  the  extent 
of  nearly  66  per  cent  of  mining  products,  shows  a  train- 
load  of  649  tons.  The  Norfolk  &  Western,  operating 
in  the  soft-coal  fields,  shows  an  average  train-load  of 
647  tons,  while  the  Chesapeake  &  Ohio  reports  683 
tons.  The  railroad  reporting  the  heaviest  train-load  of 
any  in  the  country  is  the  Pittsburg  &  Lake  Erie,  where 
in  1910,  the  average  was  1,256  tons  and  for  the  decade 
an  average  of  1,040  tons.  The  western  grain-carrying 
roads,  such  as  the  St.  Paul,  show  a  much  lighter  average 
in  this  respect,  and  range  usually  between  225  tons  and 
300  tons.  The  Rock  Island  reported  for  the  decade  an 
average  of  237  tons  and  the  Burlington  359.  Turning 
to  the  Southern  States  we  find  that  traffic  is  still  lighter 
and  that  a  road  like  the  Central  of  Georgia  reported  222 
tons  for  the  decade,  the  Atlantic  Coast  Line  182  tons,  and 
the  Seaboard  194  tons. 

There  is  a  direct  relationship  between  the  traffic 
density  and  the  train-load  and  as  a  usual  thing,  with  an 
increasing  freight  density,  there  will  be  a  growing  train- 
load.  This  does  not  always  follow,  however,  as  is 
illustrated  by  again  recurring  to  the  figures  of  the  Balti- 
more &  Ohio,  where,  with  only  a  moderate  growth  in 
freight  density,  the  train-load  increased  from  382  tons 
in  1901  to  441  tons  in  1911.    Variations  in  the  train-load 


Average  Freight  Train-load  91 

result  from  a  number  of  causes.  If,  as  is  the  case  with 
the  Erie,  and  to  some  extent  with  the  Pennsylvania, 
heavy  grades  are  a  feature  of  the  line  and,  therefore,  in 
many  instances  two  or  three  engines  are  attached  for 
long  distances  to  trains,  the  relative  average  train-load 
will  naturally  be  heavier  than  where  these  conditions  are 
not  present.  The  Great  Northern  has  always  been  noted 
for  its  heavy  train-load,  but  here  is  a  case  where  the 
absence  of  grades  is  a  factor.  As  a  general  thing,  the 
Great  Northern  operates  heavier  and  longer  trains  than 
any  of  its  rivals,  and  it  is  able  to  do  this  for  the  reason 
that  where  they  must  climb  mountain  ranges,  it  avoids 
the  steepest  grades.  Its  average  in  this  item  for  the 
decade  was  497  tons  as  compared  with  286  tons  on  the 
Canadian  Pacific  and  395  tons  on  the  Northern  Pacific. 

So  it  will  be  seen  that,  dependent  on  the  policy  of 
the  company,  and  also  on  the  topography  of  the  ter- 
ritory, a  train-load  may  be  either  heavy  or  light.  With 
the  low-grade,  coal-carrying  roads  it  is  heavy  because 
they  operate  large  capacity  trains  with  single  engines ; 
with  the  steep-grade  coal  carriers,  it  may  be  heavy  when 
they  operate  long  trains  with  two  or  more  engines  at- 
tached, as  in  the  case  of  the  Erie,  and  the  Pennsylvania 
system  on  such  lines  as  the  Northern  Central.  A  more 
accurate  comparison  of  results  for  these  two  types  of 
road  would  be  secured  by  reducing  the  tonnage  to  engine- 
miles  and  not  to  train-miles.  This  can  usually  be  done 
by  means  of  the  engine-mileage  figures  which  are  fur- 
nished in  most  of  the  reports. 

As  a  general  proposition,  however,  if  a  train-load  is 


92  The  Physical  Factors 

showing  a  relative  upward  trend,  it  signifies  that  the 
efficiency  of  the  company  (its  intensive  development)  is 
improving;  while  if  the  train-load  remains  stationary 
or  steadily  tends  downward  (unless  for  special  reasons) 
it  should  be  a  danger  signal  to  the  security  holders. 

An  example  of  an  unusual  showing  in  the  train-load  is 
that  of  the  Minneapolis  &  St.  Louis.  Here  we  find 
that  the  train-load  at  the  end  of  the  decade  was  prac- 
tically no  higher  than  at  the  beginning.  But  we  also 
see  that  the  freight  density  during  the  10-year  period 
actually  declined  about  50  per  cent,  while  passenger 
density  remained  about  the  same.  Mileage  operated  grew 
during  the  decade  about  100  per  cent,  and  as  new 
mileage  was  added  year  by  year,  the  average  earnings 
per  mile  grew  smaller.  The  company  easily  paid  regu- 
lar dividends  on  both  its  preferred  and  common  stocks 
in  the  earlier  years,  but  in  1909  failed  to  earn  its  pre- 
ferred dividend  (although  it  was  paid)  and  dividends 
have  since  been  discontinued  altogether.  This  would  be 
a  far  more  unsatisfactory  showing  than  it  is  were  it 
not  for  the  fact  that  the  mileage  has  been  added  to 
each  year  without  increasing  the  capital  items  in  as  great 
a  ratio ;  and,  as  measured  on  the  mileage  basis,  the  fixed 
charges  have  declined  considerably,  although  in  less  ratio 
than  the  net  earnings  have  recently  fallen  ofif.* 


*  As  arranged  in  "Moody's  Analyses,"  the  train-load  records  are  of 
much  value.  Their  worth  to  the  holder  of  securities  is,  as  already  pointed 
out,  in  their  comparative  use  and  in  relation  to  the  trend,  and  in  connection 
with  the  showing  made  by  other  properties  in  similar  territory.  While 
these  figures  can  be  dug  out  of  annual  reports  (if  one  has  the  reports) 
they  are  nowhere  else  available,  and  are  here  presented  in  complete  and 
convenient   form. 


XIV 

Train-mile  Earnings 

Any  well  constructed  table  showing  comparative  fig- 
ures over  a  series  of  years  of  the  train-mile  earnings  of 
the  different  properties  is  of  very  great  value  in  analyzing 
the  securities  of  the  railroad.  The  figures  are  obtained 
by  dividing  the  total  gross  receipts  of  the  year  (given 
in  totals  in  all  reports)  by  the  "revenue  train-mileage." 
The  latter  figures  are  always  given  among  the  traffic  sta- 
tistics, and  are  simply  the  number  of  miles  run  during 
the  year  by  all  passenger  and  freight  revenue-producing 
trains.  "Non-revenue  mileage"  (miles  run  by  work  trains, 
etc.),  is  not  usually  included  in  these  figures.  Any  mile 
run  by  any  revenue  train  is  a  "revenue  train-mile," 
and  it  will  be  realized  that  these  train-miles  in  a  year 
run  up  into  the  millions.  For  instance,  the  Baltimore 
&  Ohio  report  for  1911  shows  that  in  the  freight  traffic 
for  the  year,  there  were  no  less  than  26,557,919  miles 
run ;  which  means  that  freight  trains  on  the  Baltimore  & 
Ohio  railroad  ran  a  length  last  year  equal  to  over  one- 
quarter  of  the  distance  between  the  earth  and  the  sun, 
and  about  ninety  times  the  distance  between  the  earth 
and  the  moon.  Passenger  trains  ran  during  the  same 
year  16,369,066  miles,  so  that  if  we  add  the  freight  and 

(93) 


94  The  Physical  Factors 

passenger  train-miles  together,  we  get  a  total  of  42,926,- 
985  miles  as  the  aggregate  distance  run  by  revenue 
trains  of  all  kinds  on  the  Baltimore  &  Ohio  last  year.  To 
give  another  example,  we  find  by  the  Pennsylvania  Rail- 
road report  for  the  year  1910,  that  the  mileage  run  by 
revenue  freight  trains  that  year  was  31,247,374  and  by 
revenue  passenger  trains  26,350,862,  a  total  for  both  of 
57,598,236  miles;  a  distance  equal  to  nearly  two-thirds 
of  the  vast  space  between  the  earth  and  the  sun.  No 
more  vivid  idea  of  the  essential  character  of  railroad 
property — property  in  motion — can  probably  be  gotten 
than  by  reflecting  on  such  facts  as  these. 

As  the  total  gross  operating  revenues  from  transpor- 
tation on  the  Baltimore  ,&  Ohio  in  1911  were  $87,264,- 
060,  we  find  that  by  dividing  this  figure  by  the  number 
of  miles  run  by  all  revenue  trains  (42,926,985),  we  will 
get  $2.02  as  the  gross  amount  of  money  earned  on  the 
average  on  every  mile  run  by  trains  during  the  year. 
This  amount  is  the  gross  revenue  per  train-mile  or  train- 
mile  earnings.  Its  value  in  an  analysis  will  be  recog- 
nized at  once.  It  shows  the  gross  earning  power  of  the 
property,  and  is,  more  than  any  other,  the  key  to  the  entire 
question  of  railroad  values.  Considered  comparatively,  over 
a  series  of  years,  it  indicates  the  trend  of  change  from 
year  to  year,  showing  whether  the  road  is  improving  or 
declining  in  its  capacity  for  doing  business,  and  also, 
what  its  position  is  in  this  regard  in  relation  to  oilier 
properties  of  like  general  character. 

Different  railroads  show  great  diversity  in  train-mile 
earnings  as  in  almost  everything  else.    Thus,  while  East- 


Train-mile  Earnings  95 

ern  roads  like  the  Baltimore  &  Ohio  have  averaged  dur- 
ing the  decade  in  many  cases  less  than  $2.00  per  train- 
mile  many  of  those  in  the  West  have  shown  averages  far 
above  this  figure.  The  Baltimore  &  Ohio  has  averaged 
for  the  decade  $1.94;  the  New  York  Central,  $1.91 ;  the 
Atlantic  Coast  Line,  $1.80;  and  the  Southern,  $1.62; 
while  the  Atchison  reports  an  average  of  $2.30;  the 
Union  Pacific,  $2.97;  the  Northern  Pacific,  $2.87;  and 
the  Great  Northern,  $2.93.  In  change  of  results  through 
the  decade  we  find  that  the  train-mile  earnings  on  the 
Atchison  rose  from  $2.00  in  1902  to  $2.52  in  1911; 
those  of  Buffalo,  Rochester  &  Pittsburg  rose  from  $1.91 
to  $2.42;  the  Great  Northern  from  $2.60  to  $2.80;  the 
Chesapeake  &  Ohio  from  $1.76  to  $2.31  ;  the  Burlington 
from  $1.60  to  $2.32,  and  so  following. 

The  train-mile  earnings  on  a  railroad  do  not  neces- 
sarily expand  in  ratio  to  the  increase  in  train-load  or  in 
traffic  density.  A  case  in  point  is  that  of  the  Alabama  & 
Vicksburg.  The  train-load  on  this  property  has  in- 
creased 30  per  cent,  since  1902;  its  freight  and  pas- 
senger density  have  nearly  doubled  and  its  gross  revenue 
has  increased  per  mile  over  70  per  cent.  But  the  train- 
mile  earnings  have  stood  absolutely  still,  and  in  1911 
averaged  even  less  than  they  did  in  1902.  But  in  the 
earlier  year  they  "were  abnormally  high  for  a  road  of 
this  type,  and  although  far  more  trains  arc  being  run 
to-day  and  far  more  money  made,  the  earnings  on  every 
mile  run  are  no  more.  The  road  is  simply  running  more 
trains  in  a  given  time  and  making  exactly  the  same 
money  per  train.    One  of  the  reasons  for  this  is  that  the 


96  The  Physical  Factors 

freight  rates  are  nearly  15  per  cent,  lower  than  they 
were  at  the  beginning  of  the  decade.  On  the  other 
hand,  if  we  examine  the  figures  of  the  Chesapeake  &  Ohio, 
we  will  see  that  whereas  in  1902  the  earnings  per  train- 
mile  were  $1.76,  by  1911  the  figure  had  increased  to 
$2.31,  an  expansion  of  50  per  cent.,  and  indicating  that, 
as  shown  by  the  mileage  growth,  the  equipment  increase? 
the  changes  in  traffic  density  and  the  train-load,  while  the 
business  activity  of  the  system  had  undergone  growth 
and  expansion  during  the  decade,  yet  on  every  mile 
run  $2.31  was  earned  in  1911  as  against  $1.76  in  1902, 
thus  indicating  great  progress  in  operating  efficiency  and 
general  earning  power. 

It  can  be  set  down  as  a  general  principle  that  where 
a  railroad  is  showing  a  high  average  in  train-mile  earn- 
ings or  a  healthy  upward  trend,  there  is  little  fault  to 
to  be  found  with  the  operating  side  of  the  property,  re- 
gardless of  what  the  financial  side  may  be.  The  Erie, 
while  its  capitalization  features  are  not  entirely  to  be 
commended,  makes  an  excellent  showing  in  earning  power 
for  the  decade.  The  earnings  per  train-mile  increased 
from  $1.82  in  1902  to  $2.34  in  1911,  and  the  average 
for  those  years  was  considerably  higher  than  that  shown 
by  the  New  York  Central.  If,  however,  a  road  does  not 
improve  its  train-mile  earnings  as  its  traffic  grows  or  as 
its  mileage  expands,  then,  like  the  decreasing  train-load, 
it  is  to  be  regarded  as  a  matter  for  careful  analysis  by  the 
security  holder. 

The  net  earnings  per  train-mile  can  be  ascertained 
in  the  same  manner  as  the  gross,  by  dividing  the  net 


Train-mile  Earnings  97 

operating  revenue  by  the  total  train-mileage,  thus  show- 
ing the  amount  of  proUt  earned  per  train-mile.  On  like 
principles,  the  gross  freight  revenue  per  train-mile  and 
the  gross  passenger  revenue  per  train-mile  can  also  be 
ascertained. 

While  we  can  ascertain  the  net  operating  revenues 
per  train  mile  by  the  method  indicated  above,  it  is  an 
unfortunate  fact  that  no  separation  of  the  net  pas- 
senger and  net  freight  earnings  of  the  railroads  can  be 
obtained.  Although  the  Interstate  Commerce  Com- 
mission requires  the  roads  to  report  their  operating 
expenditures  in  great  detail,  and  in  a  uniform  manner, 
there  is  no  requirement  that  the  expenses  of  passenger 
and  freight  business  be  separately  stated.  Thus,  we 
can  never  know  whether  the  passenger  business  of  a 
given  road  is  profitable  or  not,  or  how  profitable  it  is. 
If,  however,  the  roads  were  required  to  so  construct 
their  accounts  as  to  enable  the  stock-  or  bondholder 
to  see  the  relative  profitableness  of  these  two  depart- 
ments of  the  transportation  business,  a  great  step 
forward  would  have  been  accomplished  in  the  direc- 
tion of  corporate  publicity. 

Of  course  there  are  some  effective  arguments 
against  this  suggested  change,  and  many  roads  would 
protest  aggressively  against  it.  But  when  the  matter 
is  considered  from  all  points  of  view  it  will  probably 
be  found  that  the  roads  themselves  would  be  the  gain- 
ers by  this  reform.  For  a  long  time  it  was  contended 
that  the  present  requirement  of  the  Commission  that 
the  roads  state  their  "outside  operations"  separately 


OS  The  Physical  Factors 

from  their  traffic  earnings,  would  work  great  injury; 
especially  because  some  of  the  roads  have  always  been 
obliged  to  incur  net  losses  in  these  "outside  opera- 
tions." A  few  years  experience  has  shown,  however, 
that  the  fears  of  railroad  managements  in  this  respect 
were  entirely  unfounded. 

In  fact,  the  more  complete  the  publicity  of  railroad 
operations  and  accounts,  the  better  it  will  prove  to  be 
for  the  managements  and  security  holders  alike. 


XV 

Passenger  and  Freight  Rates 

Railroad  reports  nearly  always  furnish  their  stock- 
holders with  figures  showing  the  average  rates  received 
per  passenger  per  mile  and  per  ton  per  mile.  Where 
they  do  not,  these  figures  can  always  be  ascertained  by 
the  following  method :  For  the  average  rate  received 
per  passenger  per  mile,  divide  the  total  passenger  earn- 
ings for  the  year  by  the  number  of  passengers  carried 
one  mile.  The  result  will  give  you  the  average  figure 
(in  cents  or  mills)  received  per  mile  per  person.  The 
same  principles  applied  to  the  freight  traffic  (dividing 
the  total  freight  earnings  by  the  tons  of  revenue  freight 
carried  one  mile)  will  give  the  average  freight  rate  per 
ton  per  mile. 

The  freight  and  passenger  rate  statistics  are  of  great 
value  in  the  analysis  of  the  railroad  report,  particularly 
when  used  in  a  comparative  way.  Compared  over  a 
series  of  years  they  show  the  actual  tendency  toward 
higher  or  lower  levels,  and  as  the  rate  directly  affects 
the  earnings  of  the  property,  a  pronounced  change  in 
either  direction  may  be  of  the  utmost  importance. 

The  average  gross  revenue  per  passenger  per  mile 
on  all  the  railroads  of  the  United  States  for  the  year 

(99) 


100  The  Physical  Factors 

ending  June  30,  1910,  as  reported  to  the  Interstate  Com- 
merce Commission,  was  1.938  cents  (one  cent  and  nine 
hundred  and  thirty-eight  thousandths  of  a  cent).  The 
average  revenue  per  ton  per  mile  for  the  same  year  was 
.753  cent  (seven  mills  and  fifty-three  hundredths  of  a 
mill).  Both  passenger  and  freight  rates  vary  in  differ- 
ent types  of  traffic  and  in  different  parts  of  the  country, 
although,  for  most  long-haul  and  interstate  traffic,  pas- 
senger business  nowadays  tends  everywhere  to  seek  a 
common  level.  On  many  of  the  lines,  where  local 
traffic  largely  predominates,  passenger  rates  are  high  as 
compared  with  the  general  average.  On  the  Bangor  & 
Aroostook  in  Maine,  the  average  rate  during  the  past 
ten  years  has  been  2.42  cents,  while  on  the  Erie  the 
rate  has  averaged  but  1.50  cents  and  on  the  Lackawanna 
but  1.42  cents.  The  far  Western  properties,  such  as 
the  Great  Northern,  the  Northern  Pacific,  and  the  Atchi- 
son report  much  higher  passenger  rate  averages  than 
most  Eastern  properties.  During  the  decade  the  Great 
Northern  rate  per  passenger  mile  has  averaged  2.31 
cents;  that  of  the  Northern  Pacific  2.21  cents,  and  that 
of  the  Atchison  2.14  cents.  In  the  Eastern  groups  we 
find  the  New  York  Central  averaging  but  1.76  cents  for 
the  decade,  the  Pennsylvania  1.99  cents,  the  Baltimore 
&  Ohio  1.95  cents,  and  the  Lehigh  Valley  1.74  cents. 
Southern  properties,  as  a  whole,  have  generally  shown 
higher  averages  than  those  located  north  of  Washington. 
Thus,  the  Atlantic  Coast  Line  reports  an  average  of 
2.37  cents  for  the  decade ;  the  Central  of  Georgia  2.28 
cents ;  the  Louisville  &  Nashville  2.34  cents ;  the  Seaboard 


Passenger  and  Freight  Rates  KH 

Air    Line    2.27    cents,    and    the    Southern    Railway    2.29 
cents. 

Variations  in  freight  rates  among  different  railroads 
are  shown  to  be  much  more  pronounced  than  in  passen- 
ger rates.  This  fact  is  chiefly  due  to  the  vast  difference 
in  the  types  and  classifications  of  tonnage  transported 
on  the  different  lines.  For  example,  the  Qiesapeake  & 
Ohio,  the  freight  traffic  of  which  is  largely  soft  coal, 
reports  the  average  gross  rate  on  freight  business  for  die 
decade  of  .43  cent  (four  and  three-tenths  mills)  per 
ton-mile,  and  in  the  year  1900  operated  on  as  low  an 
average  as  .34  cent  (three  and  four-tenths  mills).  The 
Norfolk  &  Western  average  was  .47  cent,  that  of  the 
Erie  .60  cent,  the  Baltimore  &  Ohio  .57  cent.  On  the 
New  England  properties,  however,  where  the  freight 
traffic  is  well  diversified  and  largely  of  a  local  nature,  we 
find  the  freight  rates  per  ton  per  mile  double  or  more 
than  double  those  among  the  class  of  properties  we  have 
been  mentioning.  On  the  New  York,  New  Haven  & 
Hartford  the  average  rate  for  the  decade  was  1.42  cents, 
on  the  Boston  ^  Maine,  it  was  1.11  cents,  and  on  the 
Maine  Central  1.05  cents.  Properties  of  the  type  of  the 
Union  Pacific,  operating  in  the  far  western  territory,  re- 
port averages  considerably  higher  tlian  those  shown  by 
the  coal-carrying  roads,  but  not  as  high  as  the  figures  at- 
tained by  properties  in  New  England.  Thus  the  Atchi- 
son reports  an  average  of  .99  cent,  the  Southern  Pacific 
1.01  cents,  the  Union  Pacific  .97  cent,  and  the  Rock 
Island  .96  cent.  In  the  Southern  States  higher  rates 
generally  obtain.     The  Central  of  Georgia  reported  for 


102  The  Physical  Factors 

the  decade  an  average  of  1.09  cents,  the  Atlantic  Coast 
Line  1.28  cents,  and  the  Seaboard  1.13  cents.  Rates  on 
the  Louisville  &  Nashville  and  the  Southern  Railway 
ranged  considerably  lower. 

A  fractional  change  in  transportation  rates,  especially 
in  freight,  may  make  a  vast  difference  in  the  operating 
results  and  gross  and  net  income  of  a  railroad  property. 
If  a  railroad,  the  operating  costs  of  which  must  naturally 
increase  with  increasing  costs  of  materials  and  advancing 
wages,  cannot  maintain  its  freight  rates  or  cannot  raise 
those  rates  in  some  sort  of  ratio  to  the  advancing  costs 
of  operation,  it  is  apt  to  be  in  a  very  bad  way  indeed.  A 
difference  of  one  or  two  mills  per  ton  per  mile  on  the 
average  freight  tonnage  of  a  railroad  during  the  year, 
may  add  or  deduct  millions  of  dollars  from  the  aggregate 
gross  business.  An  illustration  of  the  effect  of  changing 
freight  rates  is  well  shown  in  the  record  of  the  Balti- 
more &  Ohio  during  the  recent  years.  For  the  year 
ended  June  30,  1900,  the  average  rate  per  ton  per  mile  on 
the  Baltimore  &  Ohio  was  .45  cent.  In  1909,  this  rate 
had  been  increased  to  .58  cent,  an  advance  of  nearly  30 
per  cent  over  the  rate  received  in  the  earlier  year.  The 
freight  earnings  of  the  system  for  the  year  1909 
amounted  to  $58,355,112.  If  the  freight  rates  in  1909 
had  been  no  higher  than  those  reported  for  1900,  the 
amount  of  the  freight  earnings  in  money  would  have 
been  (other  things  being  equal)  not  more  than 
$37,000,000,  which  of  course  would  mean  that  the  net 
profits  might  have  been  nearly  $10,000,000  lower  than 
they  were  and  that  the  road  would  not  only  have  been 


Passenger  and  Freight  Rates  10.1 

unable  to  pay  dividends,  but  it  would  have  had  diffi- 
culty in  meeting  its  fixed  charges.  The  Baltimore  & 
Ohio  record  is  an  extreme  case  of  the  eflfect  of  chang- 
ing freight  rates  in  recent  years,  as  the  rates  twelve  or 
fifteen  years  ago  on  the  road  were  abnormally  low  and 
it  was  chiefly  due  to  this  latter  fact  that  the  road  was 
forced  into  the  hands  of  receivers. 

But  nearly  all  properties  doing  a  large  interstate  busi- 
ness with  heavy  freight  traffic  were  obliged  to  face  the 
problem  of  low  freight  rates  twenty  years  ago.  In 
the  '90s  the  railroads  of  the  country,  as  a  whole,  were 
not  getting  enough  out  of  their  freight  traffic  to  meet 
their  obligations  and  pay  fair  dividends  on  invested  cap- 
ital, and  when,  in  the  last  years  of  that  decade,  prices  of 
all  sorts  of  materials  used  by  railroads  began  to  advance 
and  wages  also  tended  upward  to  a  moderate  extent, 
the  railroad  systems  were  obliged  to  make  some  definite 
move  looking  to  an  improvement  in  the  rates  received 
for  freight  transportation.  Out  of  this  situation  grew 
what  was  known  as  the  "community  of  interest"  move- 
ment. Led  by  Mr.  Cassatt,  President  of  the  Pennsylvania 
Railroad,  the  large  systems  began  acquiring  stock  inter- 
ests in  competing  or  semi-competing  lines,  not  necessarily 
with  a  view  to  controlling  these  lines  absolutely,  but 
chiefly  for  the  purpose  of  promoting  harmonious  rela- 
tions and  mutually  agreeing  from  time  to  time  on  changes 
in  rates  to  conform  with  the  changing  prices  of  ma- 
terials and  other  operating  costs.  Thus  the  Pennsylvania 
acquired  heavy  interests  in  the  Norfolk  &  Western  and 
Chesapeake  &  Ohio  and  also  in  the  Baltimore  &  Ohio. 


104  The  Physical  Factors 

The  Baltimore  &  Ohio  in  its  turn  acquired  its  stock  in- 
terest in  the  Reading  lines,  while  the  Reading  held  stock 
in  the  Erie,  the  Lehigh  Valley  and  other  roads.  The 
New  York  Central  interests  also  purchased  holdings  in 
the  Baltimore  &  Ohio  and  the  Reading,  while  in  the  Far 
West  the  Hill  and  Harriman  groups  made  various  stock 
investments  looking  to  harmonious  traffic  relations  in 
their  respective  territories. 

The  effect  of  this  general  movement  toward  a  com- 
munity of  interests  was  of  far-reaching  importance  in 
maintaining  the  stability  of  freight  rates.  To  it  can  be 
traced  the  success  during  recent  years  of  properties  like 
the  Baltimore  &  Ohio,  Chesapeake  &  Ohio,  and  the  Read- 
ing, while  a  large  proportion  of  the  successful  record 
made  by  other  great  properties  such  as  the  Pennsylvania 
and  New  York  Central  is  also  a  direct  result  of  it.  It 
is  a  matter  of  record  that  the  moderate  changes  in  freight 
rates  on  the  Pennsylvania  Railroad's  directly  operated 
lines,  which  were  shown  between  1899  and  1903,  amount- 
ing to  about  20  per  cent,  in  the  rate,  have  made  a  differ- 
ence in  net  earnings  on  the  Pennsylvania  Railroad  of 
something  like  $7,000,000  per  year,  equalling,  therefore, 
over  \y2  per  cent,  on  the  present  outstanding  stock. 

While  operating  costs  and  the  requirements  for  gen- 
eral efficiency  in  railroad  properties  have  steadily  in- 
creased during  the  past  thirty  years,  the  tendency  of 
both  passenger  and  freight  rates  has  been  almost  steadily 
downward.  It  is  only  during  the  past  eight  or  ten  years 
that  there  has  been  any  cessation  in  this  trend.  As 
already  pointed  out,  this  tendency  has  become  more 


Passenger  and  Freight  Rates  105 

serious  with  the  advancing  costs  of  operation.     It  is, 
therefore,  all  the  more  necessary  that  railroads  show 
efficiency  in  operating  their  properties  if  they  are  to 
produce  results  of  sufficient  amount  l<)  make  proper  net 
returns  for  the  benefit  of  their  stock  and  bondholders. 
The  entire   problem   is   bound   up   with   the   question 
of  the  cost  of  carrying  a  ton  of  freight  a  given  distance. 
In  other  words,  it  is  a  question  of  ton-mile  cost.     The 
ton-mile  cost  can  only  be  reduced,  on  the   average,  by 
highly   efficient   methods   of   operation,   and   if  this   cost 
advances  it  only  means  that  the  railroad  property  will 
make  less  money  for  its  security  holders.     Ton-mile  cost 
cannot  be  kept  down  unless  the  road  is  kept  up.     That 
is  to  say,  a  railroad  company  cannot  afford  to  "skimp" 
on   the  maintenance  of   its   i)roperty   for  any  length   of 
time,  or  to  curtail   its  legitimate  expenses  in  order  to 
make  an  apparently  good  showing  of  profit  per  ton  per 
mile.     Its  only  hope  is  to  increase  the  density  of  its  busi- 
ness and  to  get  a  larger  volume  of  results  out  of  a  given 
piece  of  work.       Railroad  managers  realize  this  and  the 
effort  in  all   successful   fields   has   been   concentrated   i" 
this  direction  for  more  than  a  decade. 

The  general  trend  on  Eastern  railroad  properties  of 
freight  and  passenger  rates  during  the  past  thirty 
years  is  well  brought  out  by  the  following  figures, 
showing  the  average  rates  per  passenger  mile  and  i)cr 
ton-mile  on  the  Pennsylvania  Railroad  from  1881  to 
date : 


lOf) 


The  Physical  Factors 


Passenger 
Rate    per 

Freight 
Kate    per 

Passenger 
Rate    per 

Freight 
Rate    per 

passenger-milt 

:    ton-mile 

passenger-mil 

e  ton-mile 

Year 

cents 

cent 

Year 

cents 

cent 

1881.... 

2.15 

.86 

1896.... 

1.96 

.56 

1882.... 

2.25 

.87 

1897... 

1.95 

.53 

1883.... 

2.30 

.88 

1898. . . 

1.93 

.50 

1884.... 

2.26 

.80 

1899... 

1.94 

.47 

1885.... 

1.95 

.69 

1900... 

1.98 

.54 

1886. . . . 

2.11 

.75 

1901... 

1.99 

.58 

1887.... 

2.12 

.73 

1902... 

2.00 

.59 

1888. . . . 

2.09 

.69 

1903... 

2.03 

.60 

1889. . . . 

2.08 

.69 

1904.... 

2.00 

.61 

1890. . . . 

2.08 

.65 

1905... 

2.01 

.59 

1891.... 

2.05 

.66 

1906... 

2.01 

.59 

1892. . . . 

1.98 

.63 

1907... 

1.92 

.58 

1893.... 

2.00 

.61 

1908... 

1.97 

.57 

1894. . . . 

1.98 

.58 

1909... 

1.96 

.58 

1895.... 

1.95 

.56 

1910. . . 

1.96 

.58 

It  will  be  noted  that  the  change  in  freight  rates  dur- 
ing the  thirty  years  has  been  far  more  pronounced  than 
the  change  in  passenger  rates.  As  nearly  three-quarters 
of  the  business  transported  on  the  Pennyslvania  Railroad 
is  freight,  the  vital  factor  is  the  rate  per  ton  per  mile 
received  for  freight  traffic.  In  the  thirty  years  under 
review,  we  note  an  almost  steady  decline  in  this  rate,  the 
only  upward  turn  being  the  moderate  trend  since  1899. 
In  1883,  the  rate  received  per  ton  per  mile  was  nearly 
double  what  it  was  in  1899,  and  over  35  per  cent  higher 
than  the  rate  received  last  year.  Now,  if  we  examine  the 
net  profits  of  the  Pennsylvania  Railroad  for  each  year 
since  1883  we  will  note  an  upward  trend  per  mile  of 
road  in  these  net  profits  for  practically  the  entire  period. 


Passenger  and  Freight  Rates  lit" 

Considered  in  relation  to  these  freight  rates  this  fact 
is  remarkable  enough  in  itself,  and  is  an  eloquent  demon- 
stration of  the  steadily  increasing  operating  efficiency  of 
the  Pennsylvania  property  during  the  period.  With 
freight  rates  which  are  little  more  than  half  what  they 
were  thirty  years  ago,  the  Pennsylvania  Railroad  is  now 
able  to  show  a  larger  amount  of  profit  per  ton  per  mile 
than  was  the  case  at  the  earlier  date.  This  has  not 
been  accomplished  by  cutting  down  given  costs,  which  as 
a  matter  of  fact  have  greatly  increased,  but  entirely  by 
"intensive  development"  in  the  business.  Every  act  con- 
nected with  the  operation  of  the  property  has,  on  the 
average,  shown  a  greater  proportionate  result.  It  is  like 
the  case  of  a  mechanic  who  is  paid  at  the  beginning  $2 
a  day  and  produces  results  worth  to  his  employer  $2.50 
per  day,  but  who,  after  some  experience,  increases  his 
efficiency  so  that  his  employer  pays  him  willingly  $4  per 
day  for  the  execution  of  work  worth  to  the  employer  $6 
per  day.  The  tonnage  carried  on  the  Pennsylvania  Rail- 
road in  1883,  at  .88  cent  per  mile,  did  not  in  the  aggre- 
grate  produce  a  result  equivalent  to  the  freight  trans- 
ported with  the  same  amount  of  effort  in  1910,  for  which 
the  rate  received  was  but  .58  cent  per  mile. 

The  same  analysis  of  freight  rates  can  be  applied  to 
any  other  railroad  system  in  the  country.  In  many  cases 
it  will  be  found  that  efficiency  has  not  been  developed 
to  the  same  extent  as  on  the  Pennsylvania  system,  and 
the  success  or  failure  of  railroads,  especially  within  the 
past  ten  years,  is  quite  closely  bound  up  with  this  ques- 
tion of  ton-mile  cost  and  relative  rates  received.      On  the 


108  The  Physical  Factors 

Erie  the  ton-mile  cost  is  low  and  the  ratio  of  profit  be- 
tween this  cost  and  the  rates  received  has  been  during 
recent  years  all  that  could  be  desired.  On  the  New 
York  Central  this  statement  can  be  made  with  less  pos- 
itiveness,  while  in  New  England,  the  results  shown  by 
the  New  Haven  property  do  not  demonstrate  any  such 
development  of  a  low  ton-mile  cost  as  do  roads  like  the 
Pennsylvania,  or  the  soft-coal-carrying  properties.  Of 
course,  roads  of  the  type  of  the  New  Haven,  with  a 
heavy  local  traffic  and  large  passenger  business,  usually 
have  a  wide  margin  of  profit  per  ton  per  mile  to  fall 
back  upon,  and  the  necessity  for  minimizing  their  ton- 
mile  cost  is  not  so  urgent. 


The  Income  Factors 


XVI 

Earnings  and  Their  Distribution 

Having  examined  the  physical  sides  of  the  railroad 
property,  analyzed  its  location,  its  classification  of  traffic, 
its  management,  equipment,  general  operating  efficiency, 
and  the  rates  received  for  service  performed,  we  may  then 
turn  to  its  income  results,  and  analyze  the  actual  showing 
made  from  year  to  year,  in  dollars  and  cents. 

Like  all  other  figures  in  the  railroad  report,  income 
accounts  can  only  be  examined  satisfactorily  in  a  com- 
parative way,  and  the  only  method  by  which  intelligent 
comparison  can  be  made  is  through  reduction  to  the 
mileage  basis.  And  in  considering  relative  results  with 
other  properties  the  only  practical  method,  as  in  compari- 
son of  physical  characteristics,  is  to  compare  roads  situ- 
ated in  the  same  general  territory,  of  the  same  general 
characteristics,  and  doing  the  same  general  character  of 
business.  It  will  be  realized  that  these  comparative  re- 
sults are  always  to  be  taken  with  proper  qualifications,  as 
there  are  often,  even  in  the  cases  of  properties  of  very 
similar  type,  certain  cardinal  differences  which  neces- 
sarily make  great  changes  in  results  and  fully  account 
for  facts  which,  other  things  being  equal,  might  strongly 
affect  the  final  judgment  passed  upon  a  property. 

(Ill) 


113  The  Income  Factors 

While  in  certain  final  results  every  railroad  in  the 
United  States  can  be  intelligently  compared  (as,  for  ex- 
ample, we  can  compare  the  margin  of  safety  shown  over 
fixed  charges  by  the  Pennsylvania  with  the  margin  shown 
by  the  Louisville  &  Nashville  or  the  Atlantic  Coast  Line, 
or  the  percentage  of  gross  business  on  the  net  capital  of 
any  of  these  lines,  and  make  use  of  these  comparisons 
as  an  intelligent  guide),  yet  when  we  come  to  compare 
the   relative  results  as  shown  in  the  gross  business  or 
receipts  per  mile  of  two  railroad  systems,  we  cannot, 
unless  we  take  into  consideration  the  type  of  territory 
and  the  class  of  tonnage  and  other  traffic,  get  the  best 
results,  and  if  no  other  factors  are  considered,  the  com- 
parisons thus  made  might  lead  to  very  absurd  conclu- 
sions.   Thus,  one  might  say  that  the  New  York,  Susque- 
hanna and  Western,  which  in  1911  reported  an  average 
in  gross  operating  revenue  of  $16,891  per  mile,  made  a 
better  showing  than  the  Great  Northern,  which  reported 
for  the  same  period  gross  operating  revenue  of  $8,456 
per  mile ;  whereas,  as  a  matter  of  fact,  the  Great  Northern 
made  a  far  better  relative  showing  than  the  other  and, 
in  fact,  a  better  relative  showing  than  most  other  rail- 
roads  in   the   United   States.     Similarly,   we   sometimes 
see  it  stated  in  the  offering  of  securities,  that  a  certain 
railroad  is  "earning  $12,000  or  more  per  mile,  while  the 
average  gross  receipts  of  all  the  railroads  in  the  country 
were  last  year  but  $10,722  per  mile,"  thus  implying  that 
the   road   on   which   the   securities   are   offered   is   in   a 
superior  position  in  respect  to  earning  capacity.     Now, 
while  this  may  or  may  not  be  true  in  a  given  case,  such 


Earnings:  their  Distribution  113 

a  statement  as  this  demonstrates  absolutely  nothing. 
The  Chicago  Great  Western  in  1907  earned  $11,174  per 
mile,  considerably  more  than  the  average  shown  by  all 
American  railroads  in  1908,  but  this  fact  was  no  argu- 
ment at  all  in  favor  of  the  financial  strength  or  value 
of  the  securities  of  the  Chicago  Great  Western,  which 
went  into  receivers'  hands  and  could  not  meet  its  fixed 
charges.  The  Seaboard  reported  average  gross  receipts 
for  the  decade  ending  with  1908  only  about  10  per  cent 
below  those  of  the  Colorado  &  Southern,  but  while  the 
former  went  into  receivers'  hands  the  other  was  in  a 
position  of  high  credit  and  great  financial  strength. 

These  qualifying  factors  in  matters  of  location,  etc., 
should  be  borne  in  mind  in  any  plan  adopted  for  the 
comparative  showing  of  results  in  the  different  prop- 
erties. Thus,  transcontinental  lines  in  both  the  East 
and  West  should  be  directly  compared,  "Granger"  lines 
should  be  compared,  soft  and  hard  coal  systems  should 
be  examined  comparatively,  southern  properties  should 
be  compared  one  with  another,  while  those  where  local 
traffic  predominates,  such  as  the  New  England  roads, 
should  be  considered  relatively.  In  general,  the  bases 
for  comparison  should  be  grouped  about  as  follows : 

1.     Soft-Coal-Carrying  Systems: 

Baltimore  &  Ohio.  Buffalo,  Rochester  &  Pittsburg. 

Chesapeake  &  Ohio.  Lake  Erie  &  Western. 

Hocking  Valley.  Philadelphia  &   Reading. 

Toledo  &    Ohio   Central.  Wheeling  &   Lake   Erie. 

Norfolk  &  Western.  Kanawha  &  Michigan. 

Northern  Central.  Western  Maryland,  etc. 


114  The  Income  Factors 


In  addition,  other  properties,  which,  like  the  Pennsyl- 
vania Railroad  and  some  of  its  western  lines,  the  Lake 
Shore  and  the  New  York,  Chicago  &  St.  Louis,  the 
traffic  of  which  is  made  up  in  substantial  proportion  by 
soft  coal,  should  be  given  relative  consideration  with 
these  soft-coal  roads. 

2.     Crop-Carrying  Systems : 

Atchison,  Topeka  &  Santa  Fe.  Northern   Pacific. 

Union   Pacific.  Chicago  &  North  Western. 

St.   Paul.  Canadian  Pacific. 

Burlington.  Minneapolis  &  St.  Louis. 

Rock  Island.  Chicago   Great  Western. 

Missouri  Pacific.  Colorado  &  Southern. 

St.  Louis  &  San  Francisco.  Omaha,  etc. 
Great  Northern. 

The  same  systems  which  are  grouped  in  the  general 
class  of  crop-carrying  roads  should  be  compared  for  other 
reasons.  In  many  cases  they  have  similar  character- 
istics of  other  kinds.  Thus,  the  Atchison  and  Union 
Pacific,  though  depending  upon  crop  prosperity  to  some 
extent,  have  developed  other  traffic  of  a  very  diverse 
nature  during  the  past  decade,  and  also  depend  to  a 
very  great  extent  on  a  heavy  volume  of  miscellaneous 
through  traffic,  which  becomes  more  of  a  factor  with 
every  year.  The  Canadian  Pacific,  although  deriving  a 
large  part  of  its  revenue  from  the  moving  of  the  crops 
of  the  great  Northwest,  is  a  transcontinental  line,  oper- 
ating from  ocean  to  ocean,  and  doing  business  in  practi- 
cally every  part  of  the  Dominion  of  Canada  from  Halifax 
to  the  Pacific.  But  in  general,  volume  of  business  of  all 
the  roads  may  be  judged  by  the  standards  set. 


Earnings:  their  Distribution  115 

3.  Eastern  Trunk  Lines  : 
Pennsylvania  Railroad.  Erie  Railroad. 

New  York  Central.  Pittsburg,  C.  C.  &  St.  Louis. 

Lake  Shore  &  Michigan  South-  iJaltimore  &  Ohio. 

ern.  Wabash. 

Pennsylvania  Company.  C.  C.  C.  &  St.  Louis,  etc. 

The  Erie,  although  an  "anthracite  coaler,"  is,  like 
the  Baltimore  &  Ohio,  also  a  trunk  line,  and  therefore 
is  to  be  compared  with  properties  of  both  types.  As 
already  pointed  out,  the  same  policy  should  be  followed 
in  relation  to  the  Baltimore  &  Ohio ;  and,  in  fact,  any 
of  the  larger  properties  with  branches  and  connections 
extending  far  beyond  their  special  fields,  as  do  those  of 
the  Baltimore  &  Ohio  and  the  Erie,  must  be  compared 
with  these  qualifying  facts  distinctly  in  mind.  It  is  only 
in  cases  like  that  of  the  Hocking  Valley,  the  Wheeling 
&  Lake  Erie,  Kanawha  &  Michigan  or  the  Pittsburg  & 
Lake  Erie,  where  the  systems  are  confined  within  a  cer- 
tain area,  and  where  the  dependence  on  one  line  of  ton- 
nage is  preponderating,  that  the  comparisons  can  be  made 
without  qualification. 

4.  "Anthracite  Coalers" : 

Philadelphia  &   Reading  Rail-  Delaware  &  Hudson. 

way.  New     York,     Susquehanna     & 

Central  Railroad  of  New  Jer-  Western. 

sey.  New    York,  Ontario  &  Western. 

Lehigh  Valley.  Erie  Railroad. 

Lackawanna.  Lehigh  &  Hudson  River,  etc. 

A  system  like  the  Reading,  which  does  the  largest 
anthracite  coal  business  of  the  group,  may  also  be  in- 
telligently compared  with  the  soft  coalers,  and  with  prop- 


116  The  Income  Factors 

erties  like  the  Pennsylvania  or  the  Baltimore  &  Ohio, 
both  of  which  rely  on  soft-coal  traffic  to  a  considerable 
extent.  For  the  Reading  system  has  increased  its  soft- 
coal  tonnage  160  per  cent  since  1899  and  this  now  con- 
stitutes about  44  per  cent,  of  its  entire  coal-carrying 
tonnage.  Also,  a  road  like  the  Lackawanna,  which,  while 
doing  a  heavy  hard-coal  business,  has  likewise  developed 
during  the  past  decade  a  very  heavy  miscellaneous  and 
trunk-line  business  and  a  large  passenger  traffic,  must 
be  compared  with  the  coalers  with  these  qualifications  in 
view,  and  can  also  be  fairly  and  intelligently  compared 
with  the  New  York  Central  and  the  Pennsylvania. 

5.  Eastern  &  New  England  Groups    (short  haul  traffic  pre- 
dominating) : 

New     York,     New  Haven     &       Bangor  &  Aroostook. 

Hartford.  Long  Island. 

Boston  &  Maine.  West  Jersey   &   Seashore,   etc. 

Maine  Central. 

6.  Southern  Groups  and  Systems : 

Atlantic   Coast  Line.  "Queen   &  Crescent   Route." 

Central   of  Georgia.  Atlanta  &  West  Point. 

Seaboard  Air  Line.  Georgia  Southern  &  Florida. 

Southern  Railway.  Louisville  &  Nashville. 

Alabama  Great  Southern.  Nashville,  Chattanooga  &  St. 
Mobile  &  Ohio.  Louis,   etc. 

7.  Central   Western    Systems : 

Chicago  &  Alton.  Chicago,  Indianapolis  &  Louis- 
Illinois  Central.  ville. 
Toledo,   St.  Louis  &  Western.  Vandalia  Railroad. 
Chicago  &  Eastern  Illinois.  Cincinnati,    Hamilton    &    Day- 
Wabash,  ton,  etc. 
C.  C.  C.  &  St.  Louis. 


Earnings:  their  Distribution  117 

8.     Southwestern  and  Far  Western  Systems : 
Southern   Pacific  Lines.  Missouri    Pacific. 

Texas  &  Pacific,  Rock   Island. 

Missouri,    Kansas    &    Texas.  St.   Louis  &   San    Francisco. 

Kansas  City  Southern.  Denver  &  Rio  Grande. 

St.  Louis  Southwestern. 

As  in  the  case  of  the  anthracite  coalers  and  many 
other  properties,  the  distinctive  characteristics  of  the  sys- 
tems often  "dovetail"  and  overlap,  and  it  is,  therefore,  of 
advantage  to  compare  results  very  often  between  two 
properties  in  comparatively  distinct  territories,  making 
due  allowance  for  the  known  differences  in  traffic,  density 
of  population,  alliances,  connections,  etc. 

That  the  volume  of  gross  business  on  a  given  rail- 
road cannot  be  conclusively  judged  by  comparing  the 
total  shown  per  mile  with  the  average  earnings  per  mile 
cf  all  railroads  in  the  country,  can  be  easily  demon- 
strated by  examining  the  average  showing  made  by  dif- 
ferent systems  in  the  several  groups  referred  to  above. 
The  average  gross  business  of  all  the  railroads  reporting 
to  the  Interstate  Commerce  Commission  in  the  fiscal 
year  1911  was  $11,589  per  mile  and  the  net  per  mile 
operated  (before  deducting  taxes)  was  $;5.()31.  The 
showing  made  by  the  leading  individual  roads  in  1911 
in  gross  and  net  income  per  mile  of  road  was  as 
follows: 


118  The  Income  Factors 

Gross  Net 

Operating  Operating 

Revenue.  Income. 

1.  Soft-Coal  Carrying  Systems:  lou  i9ii 

Baltimore  &  Ohio $19,880  $5,690 

Chesapeake  &   Ohio 14,618  4,841 

Hocking  Valley    20,492  7,351 

Northern  Central    (1910) 27,290  4,316 

Norfolk  &  Western 18,031  6,389 

Buflfalo,  Rochester   &  Pittsburg 15,941  5,212 

Toledo  &  Ohio  Central   ( 1909) 9,322  3,056 

Lake  Erie  &  Western   ( 1910) 6,223  1,373 

Wheeling  &  Lake  Erie 14,870  4,500 

Kanawha   &   Michigan 17,717  6,891 

Western   Maryland    13,261  5,085 

2.  Crop-Carrying  Systems : 

Atchison,  Topeka  &  Santa  Fe $10,393  $3,556 

Union  Pacific    13,325  5,868 

St.   Paul    8,650  2,412 

Burlington    9,730  3.155 

Rock  Island  8,533  2,421 

Great  Northern    8,456  3,294 

Canadian   Pacific    9,668  3,408 

Northern   Pacific    10,909  4,307 

Minneapolis  &  St.  Louis 4,960  1,529 

Chicago    Great    Western 8,394  2,123 

Colorado   &    Southern 7,849  2,707 

Omaha   9,233  3.112 

3.  Eastern  Trunk  Lines  : 

Pennsylvania   Railroad    (1910) $40,349  $11,149 

New  York  Central   ( 1910) 26,396  6,824 

Lake    Shore  &  Michigan   Southern   (1910)..  29,718  8,688 

Pennsylvania  Company  ( 1910) 38,256  12,040 

Erie  Railroad   24,923  7,901 

Pittsburg,  C.  C.  &  St.  Louis  ( 1910) 27,657  7,281 

Wabash     11.844  2,990 


Earnings:  their  Distribution  110 

4.  Anthracite  Coalers : 

Philadelphia  &  Reading  Railway $43,753  $17,738 

Central  Railroad  of  New  Jersey 39,118  16,719 

Lehigh   Valley    26,317  9,749 

Lackawanna   (1910)    44,236  18,932 

Delaware  &  Hudson    ( 1910) 24,237  9,769 

New  York,  Susquehanna  &  Western 16,891  6,451 

New  York,  Ontario  &  Western 16,423  4,885 

Lehigh  &  Hudson  River 15,174  5,777 

5.  Eastern  and  New  England  Groups : 

New  York,  New   Haven  &  Hartford $30,439  $11,094 

Boston   &    Maine 19,980  4,340 

Maine    Central    9,729  2,703 

Bangor  &  Aroostook 5,134  1,892 

Long  Island    (1910) 29,440  7,955 

West  Jersey  &  Seashore  ( 1910) 16,928  3,923 

6     Southern  Groups  and  Systems : 

Atlantic  Coast    Line $7,036  $2,488 

Central  of  Georgia 6,739  2,030 

Seaboard  Air  Line 7,187  2,404 

Southern  Railway   8,569  2,751 

Alabama   Great    Southern 14,492  3,969 

Mobile  &  Ohio 10,051  2,953 

Georgia  Southern  &  Florida 6,074  1.444 

Louisville  &  Nashville 11,742  3,804 

Nashville,  Chattanooga  &  St.  Louis 10,019  2.475 

7.     Central  Western  Systems    : 

Chicago    &    Alton $14,335  $4,074 

Illinois  Central    U,273  3.739 

Toledo,  St.  Louis  &  Western 8.375  2,597 

C.  C.  C.  &  St.  Louis 15,349  3.446 

Chicago  &  Eastern  Illinois 12,713  4.077 

Chicago,  Indianapolis  &  Louisville 10,043  3.132 

Vandalia    Railroad    12.731  2,888 

Cincinnati,  Hamilton  &  Dayton 9,381  2,129 


120  The  Income  Factors 

8.     Southwestern   and  Far  Western  Systems : 

Southern   Pacific    $12,325  $4,812 

Texas  &  Pacific 8,687  2,177 

Missouri,  Kansas  &  Texas 8,607  2,503 

Kansas    City    Southern 12,087  4,341 

St.    Louis    Southwestern 7,995  2,217 

St.   Louis  &  San   Francisco 8,319  2,667 

Missouri   Pacific    7,295  1,306 

It  will  be  noted  that  there  is  a  vast  difference  in  the 
amount  of  business  done  by  different  railroads  in  differ- 
ent sections,  and,  therefore,  the  only  intelligent  compari- 
son which  can  be  made  must  take  take  into  consideration 
the  type  of  territory  and  kind  of  tonnage  transported. 
The  Chesapeake  &  Ohio,  transporting  freight  at  a  rate 
per  ton  per  mile  of  .42  cent,  can  make  money  because 
it  is  doing  a  gross  business  of  over  $14,000  per  mile  with 
very  "low-grade"  freight  which  can  be  handled  generally 
at  unusually  low  costs.  With  this  volume  of  business  it 
makes  more  money  per  mile  of  line  operated  ($4,841  in 
1911)  than  the  St.  Paul  with  an  average  freight  rate  of 
.84  cent  per  mile  (nearly  double)  could  make  in  the  same 
period.  The  St.  Paul,  with  a  traffic  density  less  than 
one-fourth  that  of  the  Chesapeake  &  Ohio,  however,  was 
able  to  make  (in  1911)  $2,412  per  mile  on  a  gross  busi- 
ness of  $8,650  per  mile,  showing  that  with  this  difference 
in  freight  rates,  about  30  per  cent  of  the  St.  Paul's 
business  was  profit,  while  only  about  31  per  cent  was 
profit  on  the  enormously  heavier  business  done  by  the 
Chesapeake  &  Ohio.  If  the  Chesapeake  &  Ohio  could 
have  done  business  on  the  basis  of  the  freight  rates 
enjoyed  by  the  St.  Paul,  on  a  volume  of  business  equaling 


Earnings:  their  Distribution  121 

that  of  last  year,  its  net  profits  might  have  been  in  the 
neighborhood  of  $7,000  per  mile  instead  of  $4,841,  while 
if  the  St.  Paul,  with  the  same  gross  business  of  $8,650 
l)er  mile  had  receixed  but  .12  cent  per  ton  per  mile  its 
net  profit  would  probably  not  have  reached  $800  per 
mile. 

As  a  general  proposition,  therefore,  it  will  be  seen 
that  in  order  to  make  a  favorable  showing  for  their  secu- 
rity holders,  the  coal-carrying  roads,  of  both  the  anthra- 
cite and  soft-coal  type,  must,  entirely  regardless  of  their 
capitalization  and  fixed  charges,  do  a  far  heavier  busi- 
ness at  far  lower  cost  per  unit  than  those  carrying  grain 
or  other  agricultural  products ;  that  Eastern  roads,  car- 
rying miscellaneous  traffic  and  operating  in  settled  ter- 
ritories, must  do  more  business  per  mile  of  line  than 
those  in  the  Southern  or  Western  States,  and  that  all 
roads  in  which  "through"  business  predominates  must 
normally  report  heavier  gross  earnings  than  those  in 
which  local  traffic  is  the  most  important  factor.  All  of 
which  once  more  emphasizes  the  importance  of  consider- 
ing thoroughly  the  relationship  of  the  Physical  Factors 
to  the  Income  Factors  in  the  railroad  business.* 


•  As  arranged  in  "Moody's  Analyses"  the  Income  Factors  are  grouped 
immediately  after  the  Physical  Factors  and  the  same  principles  of  com- 
parison are  followed  in  every  case.  A  lOyear  record  is  furnished  of 
every  operating  railroad  or  system  where  obtainable;  averages  are  struck 
to  show  the  position  of  the  property  in  the  lOyear  results,  .nnd  these 
averages  are  compared  with  like  averages  of  four  other  properties  of 
similar  type  and  characteristics.  The  table  presented  is  in  effect,  an 
Income  Account  of  the  road  for  every  year  of  the  decide,  all  the  vit.il 
figures  being  included  and  reduced  to  the  average  mileage  basis,  thus 
showing  the  actual  earning  power  and  income  results,  as  well  as  the  dis- 
tribution   of    the    income    earned    for    every    year    c^ibraced    in    the    review. 


XVII 

The  General  Income  Account 

The  income  account  of  a  railroad,  which  in  condensed 
form  is  found  in  every  railroad  report  and  is  usually 
made  the  most  prominent  feature,  embraces  the  following 
items : 

1.  Operating  revenues    (gross  earnings)  : 

2.  Operating  expenses : 

a.  Maintenance  of  way  and  structures; 

b.  Maintenance  of  equipment; 

c.  Transportation  expenses; 
d.  Traffic  expenses ; 

e.  General   expenses. 

3.  Net  operating  revenue  (or  net  earnings). 

4.  Outside   operations. 

5.  Net  operating  income. 

6.  Income    from    investments   and  other   sourcei. 

7.  Total  net  income. 

8.  Fixed  charges: 

a.  Taxes; 

b.  Interest  on  funded  and  floating  debt,  etc ; 

c.  Equipment  charges ; 

d.  Hire  of  equipment,  etc.; 

e.  Rental  charges ; 

/.  Miscellaneous  items. 

9.  Net  income  (or  surplus). 
10.  Dividends  paid. 

(123) 


124  The  Income  Factors 

11.  Surplus  beyond  dividend  requirements. 

12.  Appropriations  for  improvements,  betterments,  etc. 

13.  Balance  carried  to  profit  and  loss. 

Certain  changes  required  by  rulings  of  the  Interstate 
Commerce  Commission  (chiefly  of  a  minor  nature,  how- 
ever) have  affected  the  comparative  results  shown  by 
the  railroads  in  the  last  few  years.  Thus,  where  formerly 
the  roads  often  followed  a  policy  of  charging  such  items 
as  "hire  of  equipment"  in  operating  expenses,  they  are 
now  required  to  state  these  items  separately  and  may 
include  them  under  the  general  head  of  "fixed  charges." 
The  same  fact  is  true  of  taxes.  Formerly  many  roads 
included  taxes  in  their  operating  expenses,  though  usu- 
ally stating  the  actual  amounts  separately.  The  revised 
method  is,  generally  speaking,  a  great  improvement  over 
the  former,  and  enables  the  investigator  to  gauge  the 
actual  results  with  much  more  accuracy  than  was  former- 
ly the  case. 


XVIII 

The  Operating  Revenues  (or  Gross 
Earnings) 

The  operating  revenues  of  a  railroad  are  the  gross 
operating  receipts  from  rail  transportation ;  that  is  to 
say,  the  gross  amount  of  money  received  from  the  actual 
moving  of  trains,  and  do  not  include  any  receipts  from 
sources  outside  of  the  railroad  operation  itself.  These 
sources  of  operating  revenue  are  classified  as  follows : 

a.  Earnings  from  freight  traffic; 

b.  Earnings    from   passenger   traffic  ; 

c.  Earnings  from  express  traffic; 

d.  Earnings  from  transportation  of  mails; 

e.  Earnings  from  miscellaneous  transportation. 

Freight  traffic  is,  of  course,  the  great  income-produc- 
ing source  of  American  railroads,  and  it  is  this  item 
which  is  to  he  watched  most  closely  by  everybody.  Tak- 
ing tlie  American  railroads  as  a  whole,  we  find  that  for 
the  year  ended  June  30.  1910.  the  proportion  of  freight 
business  to  all  traffic  (in  dollars,  not  tonnage  or  density) 
was  70.00  per  cent.  Passenger  traffic  represented  22.87 
per  cent ;  express,  mails  and  miscellaneous.  4.41  per  cent, 
and  "revenue  from  operations  other  than  transportation." 
,„„  per  cent.  Only  a  very  few  large  railroads  doing  an 
interstate  business  report  a  freight  business  of  less  than 

(1«6) 


126  The  Income  Factors 

55  per  cent  of  the  total  business  done.  One  of  these 
is  the  New  Haven,  where  the  average  for  1910  was  50 
per  cent,  and  another  the  Long  Island,  which  reported 
but  2i2  per  cent  in  freight  business  for  the  year  1911. 

On  the  other  hand,  we  find  numerous  important  rail- 
roads reporting  a  preponderance  of  freight  traffic  far 
above  the  average  mentioned.  The  Pittsburg  &  Lake 
Erie  (controlled  by  the  Lake  Shore)  reported  in  1911 
an  average  of  88  per  cent,  the  Ontario  &  Western  79 
per  cent,  the  Buffalo,  Rochester  &  Pittsburg  85  per  cent, 
the  Lehigh  Valley  80  per  cent,  and  the  Great  Northern 
74  per  cent. 

In  examining  the  gross  earnings  of  any  railroad  the 
questions  of  freight  rates,  train-load  and  freight  density 
will  assume  importance  in  direct  ratio  to  the  proportion 
of  freight  traffic  represented  in  the  total  business  of  the 
road.  One  would  give  more  consideration  to  these  mat- 
ters on  the  Buffalo,  Rochester  &  Pittsburg  and  the  Great 
Northern  than  on  the  Long  Island  or  the  New  Haven ; 
one  would  know  that,  if  a  road  which  formerly  carried 
a  smaller  proportion  of  freight  to  the  total  traffic  is 
showing  over  a  long  period  a  definite  trend  in  the  other 
direction,  the  freight  traffic  questions  are  assuming  rela- 
tively greater  importance.  The  Missouri,  Kansas  & 
Texas  in  1902  reported  77  per  cent  for  freight  traffic, 
but  in  1911,63  per  cent  was  the  figure  shown.  Obviously, 
the  passenger  traffic  is  tending  to  become  a  matter  of 
more  vital  importance  on  this  line,  and  if  this  trend  con- 
tinues a  few  years  more  it  will  have  to  be  considered 
more  closely  than  has  been  the  case  in  recent  years.    The 


The  Operating  Revenues  T-i? 

Chicago  &  North  Western  record  shows  that  whereas 
in  1902  the  freight  traffic  represented  72  per  cent  of 
the  whole,  by  last  year  it  had  fallen  to  65  per  cent. 
These  figures,  showing  the  trend,  either  upward  or  down- 
ward, for  all  the  railroads  in  the  country,  can  be  ex- 
amined and  the  proper  deductions  made  therefrom,  if  the 
investor  has  the  necessary  figures  at  hand. 

Even  a  cursory  examination  of  the  exhibits  of  Amer- 
ican railroads  will  indicate  the  remarkable  changes  which 
have  occurred  during  the  past  ten  years  in  practically 
the  entire  railroad  field,  as  far  as  gross  earnings  per 
mile  are  concerned.  And  unlike  increases  in  operating 
costs,  this  vast  growth  in  income  has  not  come  about 
as  a  result  of  advancing  rates,  for  the  prices  charged 
by  the  railroads  for  freight  transportation  have,  on  the 
average,  advanced  but  fractionally  during  the  decade, 
while  the  passenger  rates  have  as  a  whole  advanced 
not  at  all,  and  in  numerous  instances  have  declined.  The 
enormous  expansion  in  earnings  and  profits  shown  by 
many  manufacturing  industries  and  by  the  "industrial 
trusts"  generally,  have  been  in  large  degree  the  results 
of  advancing  prices  as  well  as  steady  increases  in  popu- 
lation and,  therefore,  in  markets  for  goods.  But  while 
the  railroads  have  had  the  benefit  of  movements  in  popu- 
lation and  the  advancement  of  industry  generally,  as 
well  as  of  the  steady  opening  up  and  development  of 
natural  resources,  they  have  all  made  their  records  in 
earnings  during  the  decade  without  the  opportunity  for 
increase  to  any  extent  in  tlie  rates  charged  for  handling 
tonnage.       Isolated  instances,  like  that  of  the  Baltimore 


1  'i8  The  Income  Factors 

&  Ohio  and  the  Chesapeake  &  Ohio,  may  be  cited,  but 
it  should  also  be  remembered  that  the  rates  charged 
by  these  roads  at  the  present  time  represent  advances 
from  "cut-throat"  levels,  and  even  as  they  stand  to-day 
are  not  in  any  degree  higher  than  the  rates  obtained  a 
generation  ago.  In  1889  the  Baltimore  &  Ohio  rate 
was  .59  cent;  to-day  it  is  .58  cent.  The  Chesapeake  & 
Ohio  in  1894  reported  a  rate  of  .48  cent ;  last  year  it  was 
.42  cent.  The  Atchison  in  1890  received  1.23  cents  per 
ton-mile;  last  year  it  received  but  1.03  cents. 

Comparing  the  representative  railroad  systems  of  the 
country  in  the  matter  of  changes  in  gross  operating  rev- 
enue per  mile  in  recent  years,  we  get  some  strikingly  in- 
teresting figures. 

Gross  operating  revenue  per  mile : 
Name  of  Road.  1902.  1911. 

Atchison    $7,528        $10,393 

Atlantic   Coast  Line 4,868  7,036 

Louisville  &  Nashville 9,238  11,742 

Baltimore  &  Ohio 14,905  19,880 

Boston   &   Maine 13,954  19,980 

Canadian    Pacific    4,942  9,668 

Central   of  Georgia 4,200  6,739 

Chesapeake    &    Ohio 10,212  14.618 

Burlington    6,634  9,730 

Colorado   &    Southern 4,925  7,849 

Chicago,   Milwaukee  &  St.    Paul 6,906  8,650 

Chicago  &  North  Western 8,098  9,706 

Cincinnati,  New  Orleans  &  Texas  Pacific...       16,846  27,479 

Delaware,    Lackawanna    &    Western     (1901- 

1910)    30,481         44,236 

Denver  &  Rio  Grande 7,259  9,162 

Erie  Railroad   17,833  24.923 


The  Operating  Revenues  129 

Great    Nortliern    6,864  8,456 

Kansas  City  Southern   6,543  12,087 

Lehigh  Valley   17,500  26,317 

Missouri,  Kansas  &  Texas 6.556  8,607 

Missouri    Pacific  System 6,600  7,295 

Lake  Shore    (1901-1910) 20,746  29.718 

C.  C.  C.  &  St.  Louis  (1901-1910) 9,454  15.349 

IlHnois  Central    9,546  U,273 

Michigan    Central    ( 1901-1910) 7,591  16,470 

New  York,  New  Haven  &  Hartford 21,467  30,439 

Norfolk  &   Western 10,466  18,031 

Northern   Pacific    8,246  10,909 

Pennsylvania    Railroad    (1901-1910) 27,602  40,349 

Pennsylvania    Company    (1901-1910) 20,812  38.256 

Pittshurg,  C.  C.  &  St.  Louis  (1901-1910)....  17,264  27,657 

Philadelphia   &  Reading 29,083  43,753 

Central  Railroad  of  New  Jersey 25,865  39,118 

Rock   Island    7,278  8,533 

Southern  Railway    5,592  8,659 

Union  Pacific   8,166  13,325 

Southern    Pacific    9,012  12,325 

Wabash    7,815  11,844 

Wheeling  &  Lake  Erie 8,002  14,870 

The  foregoing  systems  represent  a  large  percentage  of 
American  raihoad  mileage,  and  the  trend  in  gross  receipts 
for  all  American  railroads  is  well  reflected  by  the  re- 
sults here  shown.  There  has  been  a  wide  diversity 
in  the  relative  increases,  some  roads  reporting  a  doubling 
of  gross  revenue  per  mile,  while  others  have  reported  a 
more  modest  increase. 

The  second  important  division  in  the  gross  operating 
revenue  of  the  railroad  is  the  passenger  business.  In 
1910,  as  shown  by  the  report  of  the  Interstate  Commerce 


130  The  Income  Factors 

Commission,  the  proportion  of  passenger  business  done 
by  the  railroads  of  the  country  was  22.87  per  cent  of 
the  whole.  Like  the  freight  traffic,  passenger  traffic 
varies  on  different  lines,  roads  transporting  coal  and 
other  minerals  with  a  heavy  freight  density  usually  show- 
ing a  much  lighter  passenger  business  than  others.  With 
such  roads,  therefore,  the  passenger  rate  is  not  so  vital 
a  factor  as  it  is  on  lines  like  the  New  Haven  and 
New  York  Central.  The  rates  for  passenger  traffic  on 
the  soft-coal  roads  are  usually  higher  than  the  average, 
while  on  the  trunk  lines,  where  a  good  deal  of  through 
traffic  in  passenger  business  is  present,  the  rates  tend  to 
much  lower  levels.  Averaged  as  a  whole  we  find  that 
passenger  rates  throughout  the  country  are  in  the  neigh- 
borhood of  2  cents  per  passenger  per  mile,  but  on  the 
New  York  Central  the  rate  has  averaged  during  the  past 
decade  only  1.76  cents,  while  on  the  Pennsylvania  it  has 
been  1.99  cents.  Where  a  road  has  the  benefit  of  a  good 
deal  of  local  traffic  the  rate,  of  course,  generally  averages 
somewhat  higher. 

While  the  passenger  traffic  as  a  whole  is  a  minor 
factor,  yet  it  is  quite  as  essential  that  fairly  profitable 
rates  should  be  received  by  the  roads  for  this  class  of 
business  as  for  the  freight  transportation.  Experience 
shows  that  most  of  the  roads  cannot  do  a  profitable  pas- 
senger business  unless  they  can  average  in  the  neighbor- 
hood of  2  cents  per  mile  for  their  returns  in  this  de- 
partment. The  records  show  that  as  a  general 
thing  during  the  past  ten  years  passenger  rates  have 
tended  to  decline  fractionally,  and  this  means  that  this 


The  Operating  Revenues  131 

falling  tendency  must  soon  be  arrested  or  many  roads 
will  be  carrying  on  their  passenger  business  at  a  positive 
loss. 

On  the  New  Haven  and  New  York  Central  properties 
the  return  from  passenger  business  should  be  closely 
watched.  In  the  aggregate  the  gross  revenue  from  these 
sources  runs  into  many  millions  of  dollars,  and  a  decline 
of  10  per  cent  in  the  average  rate  would  mean  a  serious 
curtailment  of  their  operating  revenue  and,  therefore,  a 
falling  off  in  the  surplus  made  available  for  charges  and 
dividends. 

The  other  sources  of  gross  revenue  represent  but  a 
small  proportion  of  the  total  business  of  the  average 
railroad.  Little  need  be  said  in  relation  to  the  earnings 
from  express  business  and  from  the  transportation  of 
United  States  mails.  The  rates  for  this  class  of  traffic  are 
stable  and  in  the  main  profitable,  but  as  shown  by  the  rec- 
ord, less  than  7  per  cent  of  the  entire  operating  revenues 
of  the  railroads  of  the  country  was  last  year  represented 
in  transportation  of  this  type. 

Earnings  from  miscellaneous  traffic  generally  include 
those  smaller  items  which  cannot  well  be  classed  under 
the  other  heads.  Sometimes  this  miscellaneous  operating 
income  amounts  to  a  considerable  total,  as  in  the  case 
of  the  Pennsylvania  Railroad  in  1910,  when  $2,364,333, 
about  2  per  cent  of  the  total  operating  revenues,  was 
reported  under  this  head.  But  as  a  general  thing  the 
smaller  roads  report  little  or  no  "earnings  from  miscel- 
laneous traffic." 

Before  turning  to  an  examination   of  operating  ex- 


133  The  Income  Factors 

penses,  attention  is  called  to  the  fact  that  most  roads 
receive  more  or  less  income,  or  incur  some  net  loss  from 
"operations  outside  of  transportation."  Prior  to  June 
30,  1907,  such  operations  were  generally  included  in  the 
gross  operating  revenues  (or  gross  earnings),  but  the 
Interstate  Commerce  Commission  now  requires  these 
operations  to  be  reported  in  detail  separately.  Further 
comment  is  made  on  this  subject  in  the  chapter  entitled 
"Outside  Operations." 


XIX 

The  Maintenance  Accounts 

The  most  important  items  which  require  careful  ex- 
amination in  the  department  of  operating  expenses  are 
the  Maintenance  Accounts.  The  fact  that  the  railroad 
is  normally  a  moving  property,  and  that  its  very  exist- 
ence depends  upon  never-ceasing  action  in  all  its  parts, 
makes  the  question  of  "up-keep"  a  most  vital  factor  at 
all  times.  Unless  a  railroad  keeps  its  mechanism  in  con- 
stant repair  and  continuously  offsets  the  effects  of  the 
steady  depreciation  which  results  from  intense  wear  and 
tear,  its  operating  efficiency  is  soon  gone,  and  its  earning 
power  inevitably  deteriorates.  This  latter  fact  is  true 
even  if  all  sorts  of  favorable  circumstances,  such  as 
growth  in  population,  development  of  natural  resources, 
improved  traffic  connections  or  other  matters,  take  place 
on  its  lines.  And  not  only  is  it  vital  that  proper  amounts 
of  money  should  be  spent  on  the  property  regularly  for 
its  maintenance,  but  it  is  equally  important  to  know 
where  this  money  comes  from — whether  it  is  appropri- 
ated out  of  earnings  or  whether  capital  obligations  are 
created  to  supply  it. 

The  policy  adopted  by  most  railroads  in  this  country 
in   recent   years   has   been   to   appropriate  out   of   gross 


134      ^  The  Income  Factors 

earnings  for  maintenance  from  20  per  cent  to  35  per 
cent,  dependent  upon  the  needs  of  the  property  as  re- 
lated to  the  gross  business  which  it  is  doing.  There  is  no 
such  thing  as  a  fixed  "scientific"  ratio  between  operating 
costs  as  a  whole  or  gross  receipts  as  a  whole,  althougli 
such  a  theory  has  been  frequently  asserted.  The  ap- 
propriations for  maintenance  on  a  railroad  property  must 
necessarily  be  made  as  a  result  of  experience  on  that 
property  and  on  properties  of  like  type  and  doing  a  like 
character  of  business,  but  one  has  no  more  right  to  say 
that  30  per  cent  of  the  gross  income  per  mile  should  be 
continuously  spent  for  maintenance  on  a  given  property, 
regardless  of  other  considerations,  than  to  say  that  a 
railroad  operating  on  a  basis  of  75  per  cent  of  its  gross 
business  is  in  better  condition  and  better  managed  than 
some  other  railroad  which  is  operating  on  a  basis  of  55 
per  cent.  And  yet  we  see  such  statements  made  con- 
stantly, and  prices  of  securities  have  often  been  fixed 
for  a  time  by  the  wide  exploitation  of  this  theory.  For 
many  years  the  Great  Northern  was  subject  to  criticism 
because  it  steadily  operated  for  less  than  55  per  cent  of 
its  gross  business,  and  the  prediction  was  freely  made  ten 
or  fifteen  years  ago  that  it  could  never  be  permanently 
successful  unless  more  money  was  spent  per  mile  in  do- 
ing the  business  which  it  was  doing.  But  in  spite  of  this 
theory  the  Great  Northern,  while  continuing  to  operate 
at  low  relative  cost,  went  through  a  phenomenally  suc- 
cessful career,  and  is  to-day  in  as  good  condition  both 
physically  and  in  a  trafiic-producing  sense,  as  any  system 
in  its  section  of  the  country. 


The  Maintenance  Accounts  135 

Maintenance  costs,  like  all  other  items  in  the  railroad 
report,  are  to  be  judged  relatively  to  other  things — to 
the  showing  made  in  the  same  items  in  prior  years,  and 
to  the  showing  made  in  the  same  matters  by  other  rail- 
roads of  like  type  operating  in  like  territory.  Conse- 
quently, railroads  with  double  tracks  must  spend  more 
for  maintenance  of  way  than  those  having  single  tracks ; 
roads  doing  a  heavy  volume  of  business,  as  reflected  by 
the  freight-density  figures  and  the  train-load,  will  need 
to  spend  more  for  maintaining  their  equipment  and  also 
their  trackage  than  those  of  lighter  business.  The  Ca- 
nadian Pacific,  for  example,  doubled  its  freight  density 
within  the  decade  under  review,  thus  indicating  a  very 
heavy  increase  in  its  volume  of  business  and,  conse- 
quently, an  increase  in  the  wear  and  tear  of  both  track- 
age and  structures  as  well  as  of  equipment.  It  met  this 
increase  in  the  wearing-out  process  by  appropriating 
$2,555  per  mile  for  all  maintenance  costs  in  1911  as  com- 
pared with  $1,534  per  mile  in  1901.  Considered  rela- 
tively to  the  traffic  density  on  the  Canadian  Pacific,  this 
expenditure  for  maintenance  in  recent  years  is  probably 
fully  as  high,  as  far  as  requirements  are  concerned,  as 
was  the  expenditure  of  $5,901  per  mile  on  the  Baltimore 
&  Ohio  last  year. 

The  Maintenance  Expenses  are  grouped,  as  already 
pointed  out,  in  two  divisions — Maintenance  of  Way  and 
Structures,  and  Maintenance  of  Equipment.  The  differ- 
ent items  coming  under  these  heads  are,  briefly  stated, 
as  follows : 

Maintenance  of  Way  and  Structures  includes  all  ex- 


136  The  Income  Factors 

penses  for  repairs  of  roadway  and  track,  for  repairs 
and  renewals  of  machinery  and  tools,  for  ballasting,  for 
repairs  and  renewals  of  switches,  ties,  fences,  bridges, 
culverts,  stations,  shops,  and  other  structures  used  in  the 
business  of  transporting  freight  and  passengers. 

Maintenance  of  Equipment  includes  all  expenses  for 
repairs  and  renewals  of  all  freight  and  passenger  cars, 
locomotives,  company  cars,  other  railroad  equipment  of  a 
movable  nature,  and  the  maintenance  of  shop  machin- 
ery, etc. 

In  judging  the  maintenance-of-way  expenditures  of  a 
given  line,  the  physical  characteristics  must  in  all  in- 
stances come  in  for  careful  consideration.  If  a  railroad 
is  obliged  to  maintain  extensive  sidings  and  terminals  in 
addition  to  its  ordinary  trackage,  it  is  obvious  that  it 
should  spend  more  than  a  railroad  of  the  same  type  in 
other  respects  which  does  not  have  these  characteristics. 
If  the  road  is  doing  a  single  line  of  business  of  the  type 
of  the  Detroit  &  Mackinac,  with  light  density,  compara- 
tively small  wear  and  tear,  and  has  no  terminals  or  extra 
trackage  to  keep  up,  it  need  not  spend  nearly  so  much  per 
mile  as  would  otherwise  be  necessary.  The  Detroit  & 
Mackinac  spent  in  1911  only  $502  per  mile  in  mainte- 
nance of  w^ay,  and  averaged  for  the  decade  only  $553 
per  mile.  Yet  this  small  amount  has  apparently  been 
sufficient  to  maintain  the  property  at  as  high  a  standard 
as  has  been  necessary  for  its  type  of  business,  and  rela- 
tively is  probably  as  good  as  the  New  York  Central's 
average  for  the  decade  of  $2,934  per  mile.  In  fact,  the 
maintenance-of-way  expenditures  on  the  railroads  vary 


The  Maintenance  Acccounts  137 

all  the  way  from  the  nominally  low  showing  of  the  De- 
troit &  Mackinac  to  the  totals  shown  by  the  Pittsburg  & 
Lake  Erie  a  few  years  ago  of  more  than  $15,000  per 
mile. 

The  same  observations  hold  in  relation  to  the  main- 
tenance of  equipment  costs.  The  small  Detroit  &  Macki- 
nac can  thrive  on  an  average  expenditure  for  the  decade 
in  this  item  of  only  $495  per  mile,  while  the  heavily 
equipped  Lackawanna  requires  an  average  of  $4,473  per 
mile,  or  nearly  ten  times  as  much. 

In  the  light  of  the  10-year  records  presented  in 
"Moody's  Analyses,"  the  maintenance  expenditures  for 
both  way  and  equipment  can  be  judged  very  fully. 
As  a  rule,  very  fair  comparison  can  be  made  be- 
tween properties  located  in  similar  territory,  and  al- 
though the  figures  cannot  always  be  accepted  as  ac- 
curate guides,  as  so  many  qualifying  factors  enter 
in  to  aflfect  the  result,  yet  where  there  has  been  a  definite 
lack  of  proper  maintenance  expense,  or  where  more  has 
been  included  in  this  account  tlian  the  conditions  or  re- 
quirements would  seem  to  warrant,  the  fact  can  be 
readily  detected.  In  a  general  way  it  can  be  stated  that 
a  normal  average  of  $1,000  to  $1,500  per  mile  should 
be  spent  for  maintenance  of  way  on  western  or  southern 
lines,  where  practically  all  the  mileage  is  single  track, 
while  the  ordinary  trunk  lines  should  spent  from  $1,500 
to  $2,000  in  the  same  department.  In  maintenance  of 
equipment,  the  matter  of  mileage  and  type  of  territory 
does  not  govern  to  the  same  extent,  and  the  relation- 
ship of  the  costs  to  the  traffic  density  for  both  passen- 


138  The  Income  Factors 

gers  and  freight  is  much  closer  than  in  the  other  main- 
tenance items.  The  figures  showing  changes  in  equip- 
ment owned  can  be  profitably  compared  in  connection 
with  the  maintenance-of-equipment  items,  as  obviously, 
if  the  equipment  owned  is  increasing  in  relation  to  the 
mleage  operated,  the  maintenance-of-equipment  costs 
should  increase  in  proper  ratio  also. 

Two  important  factors  affecting  vitally  the  mainte- 
nance expense  records  of  American  railroads  during  the 
past  decade  should  not  be  overlooked.  One  of  these  is 
the  policy  which  was  followed  by  many  railroads  during 
the  years  of  unusual  prosperity  prior  to  1907  of  charging 
into  maintenance  accounts  many  large  items  which  really 
represented  improvements  and  betterments  to  the  prop- 
erty and  which  normally  would  not  appear  there. 
Charges  of  this  kind  have  been  labelled  "concealed  earn- 
ings," and  it  is  well  known  that  heavy  amounts  have  been 
spent  in  this  way  in  many  instances.  For  example,  the 
vast  amounts  spent  for  maintenance  on  the  Pittsburg  & 
Lake  Erie,  aggregating  in  the  one  year  of  1903  no  less 
than  $27,738  per  mile,  were  to  the  extent  of  possibly  65 
per  cent  not  "maintenance"  expenses  at  all,  but  actual 
expenditures  for  construction  and  the  purchase  of  en- 
tirely new  equipment,  etc.  The  Lake  Shore,  the  Lehigh 
Valley,  the  Pennsylvania  and  its  separately  operated  lines, 
the  Lackawanna,  the  Southern  Pacific,  and  the  Union 
Pacific — all  of  these  roads  were  spending,  in  the  years 
immediately  prior  to  1908,  important  sums  for  better- 
ments which  were  charged  into  the  operating  costs  in 
one  way  or  another. 


The  Maintenance  Accounts  139 

This  practice  has  had  two  normal  results.  First,  it 
has  made  the  comparative  record  appear  to  disadvan- 
tage when  examined  in  connection  with  the  results 
which  have  more  recently  been  shown  by  raising 
the  10-year  average  a  little  above  the  true  ex- 
penditure for  maintenance  for  the  decade.  Second, 
it  has  put  many  of  the  roads  in  a  position 
of  exceptional  strength,  where  they  have  found 
it  comparatively  easy  in  a  depressed  condition  like  the 
present  to  make  enormous  curtailments  in  maintenance 
expenses  for  a  time  without  running  the  risk  of  seriously 
depreciating  the  efficiency  of  their  properties.  This  was 
precisely  the  position  of  the  Baltimore  &  Ohio,  the  Penn- 
sylvania, the  Atchison,  the  Union  Pacific,  and  the  South- 
ern Pacific  in  1910  and  1911.  Superficial  criticism 
was  rampant  for  many  months  regarding  the  so-called 
policy  of  the  Union  Pacific  in  currently  "skinning  the 
road"  in  order  to  make  a  good  net  showing  for  its  stock- 
holders. There  is  nothing  in  this  point  of  view  and 
would  not  be  until  the  road  had  continuously  followed 
this  policy  of  retrenchment  for  a  much  longer  period  of 
time  than  it  has  done.  In  recent  months  the  l^nion 
Pacific  maintenance  cost  have  tended  to  rise  radically 
again. 

The  other  factor  which  should  be  borne  in  mind  in 
an  examination  of  maintenance  expenses  of  the  railroads 
for  the  last  decade  (and  indeed  equally  in  any  other 
operating  or  improvement  costs)  is  the  great  increase 
which  has  taken  place  in  the  prices  of  all  materials  used 
by  the  roads.     This   fact,  coupled  with  that  of  the  rise 


140  The  Income  Factors 

in  wages  (which  on  the  average  are  from  10  to  15  per 
cent  higher  than  ten  years  ago),  has  naturally  resulted 
in  making  it  more  expensive  for  a  railroad  to  maintain 
a  given  mile  of  line  and  a  given  amount  of  equipment 
than  was  possible  in  1902.  If  a  railroad  spent  $1,000 
per  mile  then  for  the  up-keep  of  its  line,  it  probably  has 
to  spend  not  less  than  $1,300  to-day  for  precisely  the 
same  amount  of  maintenance.  This  fact  should  in  no 
case  be  overlooked.  It  indicates  for  one  thing  that  the 
amounts  of  "concealed  earnings"  in  some  properties  have 
not  been  as  great  as  generally  supposed  and  it  also  im- 
plies that  a  railroad  which,  like  the  Iowa  Central,  re- 
ported the  same  figure  for  maintenance  per  mile  in  1908 
as  it  did  in  1899,  was  really  not  doing  as  much  in  the 
former  year  in  maintaining  its  property  as  it  was 
twelve  years  ago. 


XX 


Transportation  and  Other  Operating 
Expenses 

Prior  to  the  adoption  of  the  uniform  accounting  sys- 
tem in  force  since  June  30,  1907,  the  railroads  usually 
classified  their  expenses  outside  of  maintenance  under 
the  general  head  of  "Conducting  Transportation  and 
General  Expenses."  This  general  head  has  been  sub- 
divided by  the  ruling  of  the  Commission  into  "Transpor- 
tation Expenses,  Traffic  Expenses,  and  General  Ex- 
penses," while  expenses  of  outside  operations  are  now 
included  in  an  entirely  separate  account.  For  discussion 
of  the  latter  see  chapter  on  "Outside  Operations." 

As  a  railroad's  traffic  density  increases,  the  cost  of 
conducting  transportation  must  necessarily  rise,  but  bar- 
ring increasing  costs  of  labor  and  service  it  should  not 
radically  change  except  in  some  relationship  to  changes 
in  gross  business  and  traffic  density.  If  a  road's  density 
is  increasing  and  its  gross  earnings  are  showing  expan- 
sion, a  tendency  to  keep  down  transportation  costs  is 
usually  a  sign  that  efficiency  is  being  developed.  Of 
course,  transportation  costs  will  grow  as  gross  busi- 
ness increases,  but  such  costs  should  not  grow  in  as 
great  a  ratio.     On  the  other  hand,  with  traffic  den- 

(141) 


142  The  Income  Factors 

sity  standing  still  or  declining,  and  gross  business  falling 
off,  operating  costs  of  this  character  should  decline  also, 
though  not  necessarily  to  the  same  extent.  As  in  any 
other  business  there  is  a  level  below  which  operating 
costs  cannot  go.  Certain  expenses  are  fixed  if  the  rail- 
road is  to  operate  at  all,  and  often  we  find  the  case  of  a 
small  road  which  for  extended  periods  will  be  operated 
at  an  actual  loss,  while  more  than  one  large  system  is 
burdened  with  controlled  or  leased  lines  which  are  car- 
ried along  from  year  to  year  by  the  parent  company 
in  the  face  of  constantly  recurring  deficits.  This  is 
another  fact  which  goes  to  emphasize  the  importance 
of  making  the  railroad  "work  for  its  board."  It  cannot 
stand  still,  for  then  it  is  worthless,  while  if  it  keeps 
moving  it  must  develop  sufficient  traffic  to  earn  its  oper- 
ating costs,  in  default  of  which  it  is  usually  worse  than 
worthless. 

Generally  speaking,  if  a  railroad  is  showing  a  record 
of  stability  in  its  traffic  and  a  heavy  train-load,  the  costs 
of  conducting  transportation  will  tend  to  consume  a  less 
percentage  of  its  gross  receipts  than  otherwise.  The 
Norfolk  &  Western  reports  an  average  of  about  37  per 
cent  of  its  gross  business  as  consumed  in  operating  costs, 
while  the  New  Haven  averages  about  48  per  cent.  The 
train-load  on  the  former  has  averaged  for  the  decade 
561  tons,  while  on  the  New  Haven  the  average  has  been 
but  245  tons.  On  the  Great  Northern,  with  its  train- 
load  average  of  497  tons,  the  percentage  has  been  below 
30  per  cent,  while  on  the  Missouri,  Kansas  &  Texas 
reporting  an  average  train-load  of  216  tons,  the  figure 


Transportation  Expenses  143 

on   transportation   expenses  exceeds  45   per  cent  of   the 
gross. 

In  examining  the  relative  amounts  of  transportation 
expenses  on  different  properties  and  showing  their  rela- 
tionship to  the  general  efficiency  of  operation,  as  reflected 
in  the  density  and  the  train-load,  the  strength  or  weak- 
ness of  a  property  is  clearly  brought  to  the  light.  If  a 
property  like  the  Norfolk  &  Western,  with  a  long 
record  for  stable  traffic  and  a  steadily  growing  growing 
train-load,  consumes  only  37  per  cent  of  its  gross  re- 
ceipts in  carrying  on  its  business  (operating  its  trains) 
it  is  clearly  in  a  much  stronger  position  than  the  Mis- 
souri, Kansas  &  Texas,  which  consumes  45  per  cent 
in  the  same  way.  In  the  event  of  a  pronounced  depres- 
sion, if  the  gross  business  of  the  Norfolk  &  Western 
fell  ofT  30  per  cent,  it  could  still,  with  a  moderate  curtail- 
ment of  maintenance  expenses,  continue  the  full  opera- 
tion of  its  property  and  easily  carry  its  charges.  But 
should  the  gross  business  of  the  Missouri,  Kansas  & 
Texas  fall  away  to  like  extent,  even  with  a  very  drastic 
cutting  of  maintenance  costs,  it  would  probably  fall  far 
short  of  earning  its  full  charges.* 


*  The  point  may  be  here  raised  that  the  Norfolk  &  Western  would  be  at 
an  advanlage  because  of  its  relatively  lower  charges,  which  is  true. 
But  it  would  be  found  that  with  charges  relatively  the  same,  the  Missouri. 
Kansas  &  Texas  would  be  in  a  far  weaker  position  than  the  Norfolk 
&  Western.  See  comment  on  "Fixed  Charges  and  the  Margin  of  Safety" 
for  demonstration  of  the  close  relationship  between  the  percentage  of  fixed 
charges  and  the  operating  costs  of  the  railroad. 


144  The   Income  Factors 

r>rief  reference  only  need  be  made  to  the  other  clas- 
sification heads  of  operating  expenses,  viz.,  Traffic  Ex- 
penses and  General  Expenses.  Traffic  expenses  cover 
such  items  as  the  wages  and  salaries  of  those  in 
charge  of  traffic,  such  as  traffic  managers,  freight, 
passenger  and  ticket  agents,  etc.,  outside  agencies,  ex- 
penses of  advertising,  expenses  of  conducting  indus- 
trial and  immigration  bureaus,  etc. 

General  expenses  embrace  the  salaries  and  expenses 
of  executive  officers,  clerks  and  accountants;  cost  of 
general  supplies,  legal  expenses,  insurance,  relief  and 
pension  departments,  general  administration  of  joint 
tracks  and  terminals. 


XXI 

Outside  Operations 

Outside  operations,  or  operations  of  the  railroad 
company  otiier  than  transportation,  is  a  new  account 
which  has  been  added  since  1907  under  the  accounting- 
requirements  for  railroads  of  the  Interstate  Commerce 
Commission.  Prior  to  the  foregoing  date,  the  gross 
revenue  from  such  operations  was  generally  included 
in  the  "miscellaneous  operating  revenues"  of  the  com- 
pany, and  the  costs  of  operation  of  these  outside  ac- 
tivities were  charged  in  the  general  operating  ex- 
penses, as  "miscellaneous  costs."  This  was  unsatis- 
factory because  it  tended  to  hide  actual  results  in  this 
department  of  the  railroad's  business,  and  there  were 
doubtless  many  cases  where  operations  of  this  kind, 
which  were  a  continual  loss  to  the  company,  were  en- 
tirely unknown  to  the  bondholders  and  stockholders. 
Included  in  the  classification  of  '"outside  operations" 
are  the  following  items:  Boat  and  Ferry  Lines;  Harbor 
Terminal  Transfers  ;  Electric  Railways  ;  Express  Lines  ; 
Cab  and  Omnibus  Service ;  Sleeping  Car  and  Parlor 
Car  Service ;  Dining  Car  and  Restaurant  Service ;  Grain 
Elevators ;  Stock  Yards ;  Telegraph  and  Telephone 
Lines ;  Amusement  Parks  and  Resorts ;  Cold  Storage 
Plants,  etc. 

All  large  railroad  systems  have  more  or  less  outside 

(145) 


1  in  The  Income  Factors 

activities  of  these  kinds ;  many  operate  their  own  rail- 
road restaurants ;  some  carry  on  their  own  sleeping-car, 
parlor-car  and  dining-car  service,  a  considerable  number 
operate  ferries  and  other  water  lines.  Thus  the  results 
from  these  activities  may  materially  change  the  net- 
income  showing  for  the  stock-  or  bond-holders,  and  the 
facts  regarding  the  profitableness  of  such  business  should 
of  course  be  clearly  shown  in  the  annual  reports. 

Sometimes  these  outside  operations  steadily  show  a 
loss,  but  this  may  be  no  reason  why  they  should  be  dis- 
continued. There  are  usually  vital  reasons  why  these 
services  are  carried  on,  and  indirectly  they  are  supposed 
to  contribute  to  the  general  earning-power  of  the  rail- 
road operation  itself.  For  example,  the  Pennsylvania 
Railroad  does  a  large  business  in  these  outside  matters 
and  last  year  reported  total  revenues  of  $5,976,385.  But 
the  cost  of  carrying  on  these  outside  businesses  was 
not  directly  profitable,  as  a  net  deficit  was  reported  for 
the  year  of  $1,309,388.  Any  one  would  be  foolish  to 
say,  however,  that  the  Pennsylvania  Railroad  should 
for  this  reason  abandon  its  ferries,  restaurants,  boat 
lines,  harbor-terminal  transfers,  etc.  If  it  followed  this 
policy,  much  of  its  passenger  and  freight  business  would 
soon  be  diverted  to  competing  roads  which  continued 
to  do  these  same  things. 

All  railroads,  however,  do  not  report  a  net  deficit 
in  their  outside  operations.  The  New  York,  New  Haven 
&  Hartford  last  year  reported  a  net  profit  of  $1,398,338, 
and  the  Delaware,  Lackawanna  &  Western  a  net  profit 
of  $210,756. 


XXII 

Net  Operating  Revenue  (or  Net  Earnings) 

Tlie  net  earnings  or  net  operating  revenue  of  the 
railroad  is  the  amount  left  over  from  gross  receipts 
after  all  expenses  of  operation,  iiicluding  maintenance, 
have  been  deducted.  It  is,  in  other  words,  the  amount 
of  profit  actually  earned  by  the  railroad  as  a  result  of  its 
operations.  It  does  not  include  any  important  profit 
or  net  income  from  sources  outside  of  the  actual  results 
brought  about  by  the  moving  of  trains,  although  before 
the  present  accounting  system  required  by  the  Interstate 
Commerce  Commission  was  in  force,  certain  items  from 
outside  operations  were  not  separately  classified. 

While  the  net  earnings  of  the  railroad  show  its  net 
profit-producing  power  as  a  railroad,  there  are  very 
few  cases  where  the  net  earnings  represent  the  entire 
income  of  the  property  which  is  made  available  from 
year  to  year  for  the  payment  of  fixed  charges  and  divi- 
dends. Practically  all  American  railroads  have  outside 
income  in  the  shape  of  interest  or  dividends  on  invest- 
ments in  controlled  and  separately  operated  lines  which 
adds  to  the  general  income  of  the  property  and  gives 
the  road  an  increased  amount  each  year  with  which  to 
pay  its  obligations,  distribute  dividends,  or  make  im- 
provements. 

(147) 


118  The  Income  Factors 

The  net  operating  revenue  of  a  raih-^ad  can  only  be 
properly  examined  and  analyzed  after  due  consideration 
has  been  given  to  the  costs  of  operation  and  the  main- 
tenance. If  a  railroad  is  not  spending  enough  for  the 
maintenance  of  its  property  or  is  economizing  in  too 
drastic  a  way  in  its  methods  of  conducting  transporta- 
tion, its  net  earnings  may  appear  to  be  very  much  heavier 
than  the  true  circumstances  warrant.  Investors  often 
examine  the  net  earnings  of  a  property  before  looking 
at  anything  else,  and  if  a  road  has  shown  an  increase 
of  10  per  cent  in  its  net  earnings  over  the  figures  of  the 
previous  year,  the  assumption  is  at  once  made  that  the 
showing  is  better  than  was  the  case  the  former  year 
and,  therefore,  that  its  securities  are  stronger.  But 
this  does  not  necessarily  follow  at  all.  as  the  road  may 
very  easily  have  so  handled  its  accounts  and  so  cut 
down  its  operating  costs  that  the  net  results  .shown  will 
not  reflect  the  true  condition  of  the  property.  This 
method  has  been  followed  many  times  in  past  years  by 
railroad  companies,  the  controlling  interests  of  which 
were  desirous  of  paying  large  dividends  for  a  period  or 
enhancing  the  market  prices  of  the  stocks  or  bonds. 
The  only  way  in  which  a  railroad  can  show  a  proper  in- 
crease in  net  revenue  for  a  given  period  is  to  increase 
its  gross  business  or  density  and  currently  spend  a  suffi- 
cient amount  of  this  gross  revenue  in  maintaining  the 
property  at  a  certain  standard  of  efficiency  and  on  a 
certain  basis  of  operation.  Temporarily  a  road  may 
curtail  its  operating  costs  to  face  a  period  of  declining 
earnings,   if   it   has   previously   spent   sufficiently   liberal 


Net  Operating  Revenues  149 

amounts  to  enable  it  to  do  tins  witli  safety.  But  where 
a  railroad  has  over  a  period  of  years  put  less  into  its 
maintenance  or  its  transportation  costs  than  has  really 
been  necessary,  it  is  then  in  no  position,  in  the  event 
of  a  depression,  to  radically  reduce  these  costs  in  greater 
ratio  than  the  fall  in  gross  receipts,  in  order  to  make  a 
good  showing  in  net  operating  profit. 

It  is  in  considering  this  feature  of  railroad  results 
that  a  10-year  comparative  record  such  as  is  given  in 
"Moody's  Analyses"  proves  of  exceptional  value.  Prop- 
erties like  the  Pennsylvania  and  the  Lake  Shore  are 
easily  shown  to  be  in  a  pre-eminent  position  for  tem- 
porarily curtailing  their  costs,  while  those  like  the  Chi- 
cago &  Alton  and  Denver  &  Rio  Grande  are  not  in 
such  position.  This  being  the  case,  any  pronounced  in- 
crease in  net  receipts  shown  by  the  latter  systems  in  the 
face  of  large  declines  in  gross  earnings  is  to  be  specially 
watched  by  the  holder  of  the  securities  of  these  lines. 
It  simply  means  that  if  such  a  policy  is  continued  for 
any  length  of  time  the  roads  will  have  to  expend  large 
sums  of  new  money  for  the  rehabilitation  of  their  jirop- 
erties,  and  that  the  general  efficiency  for  economical 
operation  will  be  seriously  curtailed. 

As  shown  on  a  previous  page,  the  net  operating  rev- 
enues of  the  difTerent  railroads,  as  reduced  to  the  mileage 
basis,  show  as  great  variation  as  does  the  gross  revenue 
per  mile.  While  the  average  net  receipts  per  mile  oi  all 
railroads  in  the  country  were  in  1911  a  little  over 
$.^,000,  the  showing  made  by  different  systems  varies 
all  the  way  from  $500  per  mile  to  more  than  $40,000 


150  The  Income  Factors 

per  mile.  Like  comparisons  of  other  figures  showing 
the  relative  condition  of  properties  in  their  net  operat- 
ing receipts  are  to  be  considered  mainly  in  connection 
with  roads  of  similar  type  and  operating  in  similar 
territory. 


XXIII 

"Other  Income"   and  Total  Net  Income 

Nearly  all  American  railroads  have  important 
sources  of  income  aside  from  that  of  the  direct  operation 
of  their  properties.  In  many  cases  this  income  is  a 
factor  of  great  importance,  and  represents  a  very  sub- 
stantial proportion  of  the  total  amount  of  money  made 
available  each  year  for  interest  and  dividend  uses.  The 
following  exhibit  shows  the  average  amounts  per  mile 
for  the  year  ending  June  30,  1911,  of  Total  Net  Income 
of  the  important  railroads  of  the  United  States,  with 
the  percentages  stating  what  proportion  of  the  whole  is 
represented  by  actual  earnings  derived  from  the  operation 
of  the  property  itself  and  what  proportion  is  derived 
from  "other  sources." 

Averafe  Proportion  Proporiion 

Tutal  Net  deriT«d      derived 

H.jji  nf  j^g^j)                                          Incfline  Per  from      fromoiher 

Mile  operation     sourcei 

Atchison    $3,769  92%      8% 

Atlantic    Coast    Line 3,191  72  28 

I.ouisville  &   Nashville 3.992  95          5 

Bahimore   &   Ohio 6.795  84  16 

Boston   &   Maine 4,692  92          8 

Canadian  Pacific   4.133  83  17 

Central    of    Georgia 2.472  82  18 

Chesapeake  &  Ohio 5.541  87  13 

(KM) 


152  The  Income  Factors 

Chicago,  Burlington  &  Quincy 3,395 

Chicago,   Milwaukee  &  St.  Paul 3,992 

Chicago  &  North  Western 3,224 

Delaware  &   Hudson 12,651 

Delaware,  Lackawanna  &  Western 24,771 

Denver  &  Rio   Grande 3,625 

Erie    Railroad    9,642 

Great  Northern  3,674 

Hocking    Valley    9,537 

Illinois   Central    5,218 

Kansas  City  Southern 4,500 

Lehigh  Valley    10,918 

Missouri,  Kansas  &  Texas 2,631 

Missouri    Pacific    1,555 

New  York  Central 10,873 

Lake   Shore    14,986 

New  York,  New  Haven  &  Hartford 15,689 

Norfolk  &  Western 7,049 

Northern  Pacific   5,206 

Pennsylvania  Railroad    15,088 

Pennsylvania  Company   21,152 

Pittsburg,  Cincinnati,  Chicago  &  St.  Louis     7,488 

Reading  Company    21,805 

Rock  Island   2,444 

St.  Louis  &  San  Francisco 3,116 

Southern   Railway    3,219 

Toledo,  St.  Louis  &  Western 3,029 

Chicago  &   Alton 4,076 

Texas   &   Pacific 2,233 

Union    Pacific    8,623 

Southern  Pacific   5,479 

Wabash    3,315 

It  will   be   noted  that  this  percentage  of   "other   in- 
come" has  varied   on  the  leading  lines   of  the   country, 


90 

10 

61 

39 

88 

12 

n 

23 

77 

23 

81 

19 

82 

18 

90 

10 

76 

24 

72 

28 

96 

4 

90 

10 

95 

5 

84 

16 

63 

Z7 

58 

42 

71 

29 

90 

10 

83 

17 

74 

26 

57 

43 

97 

3 

81 

19 

99 

1 

86 

14 

85 

15 

86 

14 

100 

97 

3 

70 

30 

90 

10 

90 

10 

Total  Net  Income  153 

all  the  way  from  nothing  on  the  Chicago  &  Alton  to 
43  per  cent  on  the  Pennsylvania  Company.  The  New 
York  Central  shows  Z7  per  cent  and  the  Union  Pacific 
30  per  cent. 

The  "other  income"  of  the  railroad  is  made  up  of 
various  items,  some  representing  interest  on  bonds  and 
stocks  held  for  investment,  some  representing  rental  of 
tracks,  rental  of  equipment,  some  representing  receipts 
from  controlled  lines  on  division  of  earnings,  etc.  The 
Pennsylvania  Railroad  reported  its  "other  income"  for 
the  year  1910  as  consisting  of  the  following  amounts 
and  items : 

Interest  and  dividends  on  securities  owned $14,999,876 

Interest  and   dividends  on  securities  of   United   New 

Jersey  R.  R.  and  Canal  Co 174,456 

Hire   of   equipment 362,510 

Interest,   General   Account 1,226,947 

Profits   from   sundry  accounts 94,326 

Rents    600,732 

Total    $17,458,847 

It  will  be  seen  that  the  most  important  item  in  the 
above  statement  is  "Interest  and  dividends  on  securities 
owned,"  and  this  will  be  found  to  be  the  case  with  the 
majority  of  "other  income"  accounts  of  the  railroads. 
Obviously,  the  question  to  be  determined,  then,  is  what 
are  these  investments  on  which  the  road  is  receiving 
income?  Are  they  securities  of  other  railroads  or  are 
they  outside  properties  of  some  kind? 

The  answer  to  this  question  leads  the  investigator 
in  many  directions.     But  the  question  of  the  sources  of 


154  The  Income  Factors 

the  "other  income"  is,  on  many  roads,  fully  as  vital  as 
that  of  the  operating  income  itself.  Examination  of 
railroad  reports  will  divulge  the  fact  that  many  of  the 
railroads  depend,  in  large  degree,  on  their  "other  in- 
come" for  the  payment  of  their  dividends ;  and  in  numer- 
ous cases,  even  a  portion  of  the  surplus  used  for  meet- 
ing interest  and  sinking-fund  payments  comes  from  the 
"other  income."  To  cite  an  instance,  we  find  that  the 
New  York  Central  in  1910  earned  (in  net),  from  all 
operations,  the  sum  of  $25,710,613;  but  its  "total  net 
income"  (from  which  sum  its  interest  and  dividends  were 
paid)  was  $41,156,946,  showing  that  its  "other  income" 
for  this  one  year  aggregated  no  less  a  sum  than  $15,446,- 
333.  Reference  to  that  company's  statement  will  show 
that  the  amount  paid  out  in  dividends  by  the  New  York 
Central  in  1910  was  $13,363,758,  and  that  this  amount 
nearly  consumed  all  the  surplus  remaining  after  fixed 
charges,  taxes,  etc.  (amounting  to  $26,868,374),  had 
been  taken  care  of.  In  other  words,  the  New  York 
Central  depended  entirely  in  1910  on  its  "other  income" 
to  pay  its  dividends,  and  without  this  "other  income" 
could  have  paid  no  dividend  whatever. 

Now,  where  did  this  "other  income"  come  from? 
From  dividends  and  interest  on  securities  owned;  from 
interest  on  money  loaned,  and  from  sundry  miscellane- 
ous profits.  The  Lake  Shore  &  Michigan  Southern,  90 
per  cent  of  the  stock  of  which  is  owned  by  the  New 
York  Central,  paid  18  per  cent  in  1910,  and  this  made 
up  a  large  part  of  the  New  York  Central's  "other  in- 
come."   The   Michigan   Central,   which   is   controlled   in 


Total  Net  Income  155 


the  same  way,  paid  8  per  cent  on  its  stock,  and  this 
made  up  a  substantial  part  of  the  other  income,  much 
of  the  balance  being  accounted  for  by  payments  made 
to  the  New  York  Central  by  a  large  number  of  smaller 
lines  and  companies,  in  which  it  has  eitlier  a  minor 
or  important  interest;  and  from  many  other  small  and 
less  important  items. 

The  "other  income,"  then,  is  a  source  of  revenue 
entirely  distinct  from  that  received  from  the  operation 
of  the  property,  and  yet,  as  is  shown  in  many  cases,  it  is 
a  factor  of  vital  importance  in  the  general  result  for 
the  period.  Consideration  of  the  other-income  figures 
leads,  in  the  first  place,  to  a  direct  examination  of  the 
balance  sheets  of  the  company,  where  the  "investment" 
account  is  carried.  As  other  income  consists  chiefly  of 
returns  on  securities  owned,  it  is  at  once  important  to 
know  what  these  securities  consist  of  and  at  what  valua- 
tions they  are  carried  in  the  balance  sheet  of  the  com- 
pany ;  in  other  words,  is  the  return  on  them  sufficient 
to  justify  the  company  to  carry  them  at  a  certain  value? 
Again  examining  the  New  York  Central  report,  we  find 
that  the  "securities  owned"  were  carried  on  the  balance 
sheet  of  that  company  in  1910  at  a  valuation  of  $131, 
557,710.  The  "other  income"  for  that  year  was,  as 
already  shown,  $15,446,330.  But  a  large  part  of  this 
sum  was  made  up  of  special  items,  such  as  interest  on 
loans,  sundry  profits,  etc.,  and  the  actual  amount  of 
money  received  by  the  company  in  direct  return  from 
its  securities  owned  was  about  $12,000,000,  which  was 
something  more  than  9  per  cent  on  the  valuation  shown. 


15G  The  Income  Factors 

This  showing  indicates  that  the  investments  held  by 
the  New  York  Central  were  not  overvalued  as  related 
to  income,  for  the  year  1910. 

But  this  does  not  finish  the  matter.  It  may  be  that 
while  the  investments  held  yielded  a  return  of  over  9 
per  cent  in  actual  dividend  or  interest  payments  for  the 
year,  they  were  undervalued  for  other  reasons,  or  over- 
valued, as  the  case  may  be.  For  example,  while  the 
Lake  Shore  paid  into  the  New  York  Central  but  18 
per  cent  on  its  stock  in  1910,  it  actually  showed  a  surplus 
equal  to  over  25  per  cent  on  its  stock,  a  large  portion  of 
which  went  back  into  the  property  in  the  shape  of  better- 
ment and  improvement  expenditures.  And  if  we  run 
back  a  few  years  in  the  record  of  the  Lake  Shore  we 
will  find  that  for  a  long  period  it  has  been  steadily  earn- 
ing each  year  a  heavy  surplus  above  the  amounts  dis- 
bursed in  dividends  to  the  parent  company.  The  logical 
conclusion  from  this  exhibit  is  that  the  equity  owned 
by  the  New  York  Central  in  the  Lake  Shore  property 
is  heavily  in  excess  of  the  value  placed  upon  that  equity 
in  the  balance  sheet.  And  further,  to  follow  the  show- 
ing made  by  the  Lake  Shore  in  its  available  surplus 
for  dividends,  we  are  led  immediately  to  examine  the 
Lake  Shore's  sources  of  income.  Total  Net  Income  of 
the  Lake  Shore  in  1910  was  $14,986  per  mile,  of  which 
$8,688  was  derived  from  net  earnings  and  the  balance 
from  "other  income."  Now,  what  did  the  "other  income" 
of  the  Lake  Shore  consist  of?  Like  that  of  the  New 
York  Central,  it  is  represented  chiefly  by  dividends  anti 
interest  on  investments.     So  we  are  led  to  examine  the 


Total  Net  Income  157 

balance  sheet  of  the  Lake  Shore,  note  the  approximate 
return  on  these  investments,  and  examine  in  turn  the 
properties  there   represented. 

Thus  it  will  be  seen  that  the  "other  income"  ques- 
tion tends  to  lead  us  far  afield,  especially  where  a  large 
railroad  system  is  being  examined,  and  where  many 
controlled  lines  are  represented.  The  Lake  Shore's 
"other  income"  is  derived  from  returns  on  investments 
in  the  C.  C.  C.  &  St.  Louis,  the  Pittsburg  &  Lake  Erie, 
the  New  York,  Chicago  &  St.  Louis,  and  other  proper- 
ties, all  of  which  have  their  own  income  accounts,  their 
own  liabilities,  and  their  own  investments.* 

One  other  important  point  connected  with  the  "other 
income"  and  investment  valuations  of  the  various  sys- 
tems should  not  be  overlooked.  While,  as  shown  in  the 
case  of  the  New  York  Central,  the  return  on  all  invest- 
ments in  1910  was  only  about  9  per  cent,  the  fact  must 
be  remembered  that  this  was  the  average  return  on  the 
aggregate  investment  holdings.  These  investment  hold- 
ings are  made  up  of  a  large  number  of  items,  some  of 
which  are  yielding  the  company  (as  in  the  case  of  the 
Lake  Shore  stock)  far  more  than  the  average  rate  of 
9  per  cent,  while  a  considerable  number  are  yielding 
nothing  at  all.  The  latter  may  be  of  the  value  given 
because  of  other  reasons — strategical  or  potential.  The 
holding  of  Rutland  stock  was  of  no  income  value,  but 
it  may  have  been  regarded  as  of  great  strategical  value. 


•  Under  the  ordinary  method  of  analyzing  security  values,  a  thorouah 
foUowing-out  of  facts  like  these  has  been  extremely  difficult;  but  the 
plan  followed  in  "Moody's  Analyses"  for  analyzing  the  different  system* 
IS  so  arranged  that  it  can  be  accomplished  in  practically  all  casei  with 
great  simplicity. 


158  The  Income  Factors 

And  in  many  cases  it  will  be  found  that  the  control 
of  a  branch  line  operates  as  a  traffic  feeder  to  a  very 
important  extent.  Further  consideration  is  given  to  this 
matter  in  the  chapter  on  Capitalization  Factors. 


XXIV 

Fixed  Charges  and  the  **Margin  of 

Safety" 

Briefly  stated,  the  fixed  charges  of  a  railroad  consist 
of  the  following  important  items : 

(o)  Interest  on  funded  debt. 
(b)   Interest  on  floating  debt, 
(f)   Rentals. 

(d)  Sinking  funds. 

(e)  Interest  and  principal  of  car  and  equipment  trusts. 

Other  items  of  a  mi.scellancous  and  usually  minor 
nature  are  often  included  under  the  head  of  fixed 
charges  in  addition  to  the  above,  and  frequently  taxes 
are  also  included  under  this  head.  Prior  to  the  adoption 
of  the  uniform  accounting  .system,  taxes  were  sometimes 
embraced  in  operating  expenses,  sometimes  in  fixed 
charges,  and  sometimes  stated  separately.  The  present 
requirement  is,  however,  that  all  taxes  be  stated  sepa- 
rately from  both  operating  expenses  and  fixed  charges. 

The  uniform  accounting  requirements  have  also  pro- 
vided that  the  roads  separately  state  such  items  as  "Hire 
of  Equipment,"  etc.,  and  in  some  instances  these  are 
items  of  material  importance.  Prior  to  1908,  such  items 
as  hire  of  equipment  were  spread  over  the  operating 
expenses  of  the  different  roads  in  a  number  of  ways. 
The  term   "hire  of  equipment'*  refers  to   the  charges 


inn  The  Income  Factors 

made  by  one  road  against  another  in  the  exchange  of 
tlieir  equipment  in  the  course  of  business.  Sometimes 
this  results  in  a  net  loss  to  a  line  and  sometimes  a  profit ; 
but  whether  a  loss  or  a  profit,  the  balance  as  shown 
in  the  income  account  is  designated  the  same. 

Taken  as  a  whole,  the  fixed  charges  of  a  property 
represent  the  sum  it  must  currently  earn  and  pay  to 
be  in  a  healthy  financial  condition.  The  reports  usually 
state  the  items  of  fixed  charges  in  satisfactory  detail  and 
the  investor  can,  therefore,  easily  judge  of  their  nature. 
It  is  frequently  the  case  that  a  railroad  has  car  or  equip- 
ment trusts  outstanding,  which  mature  serially,  a  por- 
tion of  the  principal  as  well  as  interest  being  payable 
each  six  months  or  each  year.  Items  of  this  nature 
must  naturally  be  included  in  the  charges  just  as  sinking- 
fund  payments  are ;  and  often  they  are  of  such  amount 
as  considerably  to  increase  the  sum  total  of  the  charges 
in  a  given  year. 

The  relationship  of  the  fixed  charges  to  the  property 
can  best  be  judged  comparatively,  and  when  they  are 
examined  over  a  series  of  years  the  figures  are  of  vast 
use.  There  is  a  direct  relationship  between  the  gross 
business  and  general  traffic  density  of  a  property  and  the 
percentage  of  this  business  required  for  meeting  the 
charges.  As  has  been  well  brought  out  by  IMr.  Mundy 
in  his  excellent  book,  the  "Earning  Power  of  Railroads," 
those  roads  the  fixed  charges  of  which  have  averaged  not 
more  than  30  per  cent  of  the  gross  income  have  usually 
been  able  to  withstand  financial  setbacks  with  much 
greater  ease  than  roads  with  fixed  charges  greatly  ex- 


Fixed  Charges  161 

ceeding  this  figure.  Therefore,  properties  hke  the  Lake 
Shore  and  the  Great  Northern,  which  have  spent  Hberal 
sums  for  the  maintenance  of  their  properties  and  for 
the  development  of  an  intensive  traffic,  thus  keepnng 
down  the  ratio  of  operating  costs  aside  from  mainte- 
nance, have  been  in  better  position  to  carry  their  charges 
than  some  other  roads  which,  while  showing  advances 
in  earnings  from  year  to  year,  have  been  obliged  to 
consume  a  larger  proportion  of  the  gross  receipts  in 
operating  their  trains. 

But  the  vital  question  with  the  holder  of  bond  issues 
on  railroads,  is  to  know  what  amount  of  money  remains 
available  after  payment  of  all  operating  and  other  cur- 
rent expenses  for  meeting  the  interest  on  the  bond  issues 
in  which  he  may  be  interested.  Assuming  tliat  he  has 
examined  the  operating  and  income  records  in  his  report 
in  thorough  manner  and  has  ascertained  the  relationship 
of  the  traffic  density  to  the  gross  business,  maintenance 
and  other  costs,  and  has  also  properly  examined  the 
sources  of  outside  income,  he  is  on  solid  ground  for 
ascertaining  the  position  of  the  bond  issues  in  the  results 
shown  by  the  road.  But  while  it  is  a  matter  of  interest 
to  know  what  amount  of  available  surplus  a  road  has 
shown  over  its  charges  this  year  or  last  year,  the  more 
important  thing  is  for  him  to  know  what  the  road  has 
done  in  this  regard  for  a  series  of  years.* 


•  This  thought  has  been  carried  to  fuller  development  in  "Moodv'i 
Analyses"  than  has  ever  been  attempted  before.  The  available  surplus 
above  the  charges  of  the  different  roads  is  not  merely  shown  for  two 
or  three  years,  but  is  shown  for  an  entire  decade.  In  this  way  the  in- 
vestor is  able  to  ascertain  the  trend  of  improvement  or  retrogression  for 
a  long  series  of  ye,irs.  In  order  to  reach  a  fair  basis  of  judgment  the 
records  for  each  year  are  averaged  and  the  average  showing  made  is  the 
basis  on  which  the  entire  property  is  analyzed.  Comparisons  are  made  a* 
usual   with  the  average   results  shown  by  other  properties. 


162  The  Income  Factors 

The  Margin  of  Safety  is  the  proportion  of  Total  Net 
Income  remaining  over  after  payment  of  all  current 
fixed  obligations,  including  taxes,  car  trust  principal  and 
interest  payments,  miscellaneous  items,  etc.  For  exam- 
ple, if  the  total  net  income  of  a  given  road  was  last 
year  equal  to  $10,000  per  mile,  and  the  fixed  charges 
were  $6,000  per  mile,  then  the  remainder  of  $4,000  per 
mile  (or  40  per  cent)  is  the  margin  of  safety.  It  is 
interesting  to  note  that  the  great  majority  of  American 
railroads  have  presented  comparatively  high  margins 
above  their  charges  during  the  entire  decade,  and  that 
in  most  cases  a  steady  record  of  improvement  has  been 
shown  from  year  to  year. 

Generally  speaking,  the  smaller  the  percentage  of 
Total  Net  Income  required  for  the  payment  of  the 
charges  on  the  property,  the  stronger  will  be  the  position 
of  the  bond  issues  of  that  company.  Roads  like  the 
Great  Northern,  Pennsylvania,  Atchison,  and  Union 
Pacific  can  withstand  enormous  setbacks  in  earnings  and 
profits  without  jeopardizing  the  position  or  value  of 
their  bond  issues  to  any  real  extent.  But  where  a 
railroad  system  is  obliged  to  pay  out  from  70  to  80  per 
cent  of  its  net  earnings,  or  surplus,  to  meet  its  fixed 
obligations,  a  very  moderate  falling-ofF  in  gross  business 
will  entirely  wipe  out  whatever  surplus  it  may  have 
shown.  Cases  in  point  are  the  Wabash,  the  Missouri 
Pacific,  the  Rock  Island,  etc.  A  glance  at  the  records 
will  show  that  for  the  entire  period  under  review  all 
of  these  properties  reported  a  very  low  margin  of  safety. 
During  the  eighteen  months  following  the  panic  of  1907 


Fixed  Charges  163 

many  roads  suffered  a  20  to  25  per  cent  decline  in  gross 
earnings.  Now,  if  a  road  operating  at  a  ratio  of  66  per 
cent  of  its  gross  business,  and  requiring  42  per  cent 
of  this  gross  business  for  transportation  and  traffic  ex- 
penses (running  its  trains),  at  the  same  time  carries 
fixed  charges  which  consume  an  average  of  70  per  cent 
of  its  net  earnings,  it  will,  unless  it  has  important  outside 
sources  of  income,  be  in  a  very  bad  way  if  business  falls 
off  25  per  cent.  The  outcome  would  probably  be  about 
as  follows: 

Normal  25  per  cent 

business.  decline. 

Gross  operating  revenue $10,000,000  $7,500,000 

Operating  expenses : 

Maintenance     2,400,000  1,500,000 

Transportation    expense,    etc 4,200,000  3,700,000 

Net  earnings    $3,400,000  $2,300,000 

Fixed   charges    $2,300,000  $2,300,000 

Surplus    $1,100,000 

Margin   of   safety 33% 

Thus  it  will  be  noted  that  with  a  falling  off  in  gross 
receipts  of  25  per  cent  there  would  be  a  logical  drop 
in  net  earnings  of  at  least  33  per  cent,  while  the  surplus 
or  margin  above  charges  would  have  been  completely 
eliminated,  and  the  strength  and  position  of  the  bond 
issues  would  have  been  greatly  weakened. 

The  point  may  be  raised  that  under  such  conditions 
the  road  could  curtail  its  operating  costs  to  a  greater 
extent  than  shown.     As  far  as  maintenance  is  concerned. 


164  The  Income  Factors 

it  could  probably  do  this  for  a  time  (and  in  the  illus- 
tration the  pronounced  cut  has  been  made  here),  but  it 
might  have  considerable  difficulty  in  cutting  down  its 
other  operating  costs  to  a  much  greater  extent.  A  rail- 
road must  move  its  trains,  and  this  is  the  field  of  ex- 
pense where  the  chances  of  curtailment  are  smallest. 
A  15-per  cent  curtailment  might  be  about  all  that  it 
could  stand,  but  in  maintenance  it  might  effect  a  saving 
for  a  time  of  50  per  cent.  If  it  did  this  its  margin 
might  for  a  time  be  held  above  10  per  cent,  but  only 
for  a  time,  unless  a  revival  of  business  set  in. 

On  the  other  hand,  take  the  case  of  a  road  operating 
at  the  same  ratio,  but  with  maintenance  costs  represent- 
ing 34  per  cent  of  the  gross,  transportation  costs  con- 
suming but  32  per  cent,  and  with  fixed  charges  consum- 
ing but  30  per  cent  of  the  net  earnings. 

Normal  25  per  cent 

business.  decline. 

Gross  operating  revenue $10,000,000  $7,500,000 

Operating  expenses : 

Maintenance     3,400,000  2,100,000 

Transportation    expense,    etc 3,200,000  2,700,000 

Net  earnings   $3,400,000  $2,700,000 

Fixed  charges   1,020,000  1,020,000 

Surplus    $2,380,000  $1,680,000 

Margin  of  safety 1Qi%  62% 

In  the  first  example  we  have  a  road  which  is  in  no 
condition  to  withstand  a  setback  in  earnings.  Its  oper- 
ating costs  are  such  that  they  cannot  be  radically  reduced 


Fixed  Charges  IG.") 

without  seriously  depreciating  the  earning  capacity  of 
the  property ;  its  maintenance  costs  form  the  smaller 
part  of  its  operating  expenses,  and  the  maintenance 
accounts  are  the  ones  that  are  most  elastic  and  can 
therefore  be  curtailed  fartliest  in  the  event  of  emergency. 
Added  to  this,  its  fixed  charges  require  in  normal  times 
two-thirds  of  the  income,  and  in  hard  times  they  con- 
sume it  all.  The  other  road  operates  at  low  comparative 
cost ;  its  traffic  is  heavier  and  it  makes  more  per  unit 
of  service ;  it  spends  more  for  maintenance  and  it  re- 
quires a  far  less  proportion  of  its  net  profits  to  meet 
its  charges.  Types  of  this  latter  instance  are  the  Nor- 
folk &  Western,  Lehigh  Valley,  etc. 

The  point  may  be  made  that  the  comparisons  are 
not  fair,  as  one  road  started  with  relatively  lower  fixed 
charges  than  the  other.  But  viewed  over  a  long  period 
(and  that  is  the  only  way  to  view  railroad  results), 
we  will  find  that  the  Norfolk  &  Western  attained  its 
present  strong  position  over  a  series  of  years,  not  by 
starting  with  low  fixed  charges  and,  therefore,  a  high 
margin  of  safety,  but  by  developing  it.s  volume  of  busi- 
ness, increasing  the  profit  per  unit  of  service,  and  thus, 
while  expanding  its  gross  revenue,  reducing  the  ratio  of 
its  operating  or  transportation  costs  (running  of  trains). 
The  margin  of  safety  on  the  Norfolk  &  Western  bond 
issues  twenty  years  ago  was  but  31  per  cent,  while  its 
transportation  costs  at  that  time  consumed  38  per  cent 
of  its  gross  revenue.  To-day  the  margin  exceeds  55 
per  cent,  and  the  transportation  expense  in  1911  was 
but  33  per  cent  of  the  gross  income  received.    The  same 


166  The  Income  Factors 

facts  apply,  to  less  extent,  to  the  record  of  the  Baltimore 
&  Ohio  during  the  past  decade. 

Nothing  reflects  the  inherent  stability  of  the  great 
majority  of  American  railroads  at  the  present  time  so 
well  as  the  Margin  of  Safety  records,  as  shown  for 
the  past  ten  years.  They  are  a  graphic  display  of 
the  remarkable  trend  toward  improvement  in  earning 
power  and  financial  stability  which  has  characterized  at 
least  80  per  cent  of  the  great  railroad  systems  of  this 
country  since  the  depression  of  the  '90s.  The  record 
is  the  more  remarkable  for  the  fact  that  this  has  all 
been  achieved  in  the  face  of  either  falling  or  stationary 
passenger  and  freight  rates  and  in  the  midst  of  almost 
steadily  advancing  costs  for  labor  and  materials.  Of 
course,  the  fact  is  not  to  be  overlooked  that  the  growth 
of  the  country  in  wealth  and  population  during  the 
decade,  thereby  developing  new  trafftc  to  enormous  extent. 
is  at  the  base  of  this  record  as  far  as  growth  of  the 
transportation  business  is  concerned.  But  the  almost 
steady  improvement  from  year  to  year,  in  operating 
efficiency,  in  forcing  from  the  same  eflfort  greater  results, 
is  a  testimonial  of  the  highest  kind  to  modern  American 
railroad  management  as  a  whole.  Operating  management 
of  superior  type  is  at  the  base  of  the  Margin  of  Safety 
record  shown  over  the  decade  by  such  properties  as  the 
Lehigh  Valley,  the  Southern  Pacific,  the  Pennsylvania, 
the  Atchison,  and  the  Louisville  and  Nashville.  With  a 
management  no  more  efficient  than  that  of  the  Missouri 
Pacific  during  the  past  decade,  the  Atchison  could  not 
have  shown  the  results   it  has   recently  been   showing; 


Fixed  Charges  1G7 

while  if  the  Missouri  Pacific,  with  its  low  capitalization 
and  fixed  charges,  had  been  under  an  Atchison  manage- 
ment during  the  past  ten  years  it  might  be  fully  as 
easy  for  it  to  pay  a  dividend  to-day  as  it  is  for  the 
Atchison. 


XXV 
Disposal  of  Surplus 

Theoretically,  at  least,  the  surplus  shown  by  a  rail- 
road above  its  fixed  charges  is  supposed  to  be  available 
for  dividends,  and  v^^e  often  see  it  heralded  far  and  wide 
that  such  and  such  a  road  is  showing  a  surplus  of,  or 
'"earning,"  10  to  15  per  cent  upon  its  stock.  But  like 
many  another  statement  on  which  stocks  are  sold  and 
market  prices  are  manipulated,  such  a  report  often  proves 
to  be  a  delusion  and  a  snare.  Because  a  railroad  has 
shown  a  surplus  in  its  income  account  of  10  per  cent 
upon  its  stock,  it  does  not  necessarily  mean  that  it  has 
that  amount  available  for  dividend  purposes  or,  in  fact, 
that  it  has  anything  for  such  uses.  In  the  past,  railroads 
have  frequently  reported  book-keeping  surpluses  of  vast 
amount,  and  yet  have  had  immediately  to  borrow  money 
for  current  uses.  In  1907  the  Missouri  Pacific  reported 
a  surplus  above  its  charges  and  dividends  of  nearly 
$4,000,000  for  the  year,  and  in  1909  its  balance  sheet 
showed  a  surplus  of  accumulated  income  (presumably) 
of  nearly  $10,000,000.  And  yet  the  Missouri  Pacific 
was  obliged  to  discontinue  dividends  with  the  close  of 
1907,  and  in  February,  1908.  borrowed  $6,000,000  on 
its  two-year  notes  at  5  per  cent.  Numerous  other  in- 
stances of  the  same  type  might  be  mentioned. 

(1C9) 


170  The  Income  Factors 

In  tlie  past,  especially,  many  railroads  followed  the 
policy  of  keeping  down  their  current  operating  costs, 
including  maintenance,  but  at  the  same  time  spending 
the  necessary  money  on  their  properties,  and  then,  at 
the  close  of  the  year,  deducting  from  the  surplus  shown 
above  charges,  the  amounts  currently  spent  but  not  cur- 
rently charged  up.  So  that  in  the  final  result  they  would 
really  have  no  surplus  at  all,  and  the  item  "surplus  above 
charges"  or  "surplus  above  dividends"  would  simply  be 
a  book-keeping  entry. 

This  practice  may  or  may  not  be  reprehensible.  The 
real  situation  can  only  be  judged  in  connection  wit1i  the 
actual  operating  and  maintenance  expenses  shown.  If  a 
railroad  is  not  charging  a  proper  amount  of  maintenance, 
but  is  holding  up  items  which  properly  belong  there  and 
deducting  them  from  surplus  at  the  end  of  the  year 
as  "betterments  and  improvements,"  then  the  method  is 
certainly  misleading.  It  is  one  of  the  strong  argu- 
ments in  favor  of  the  uniform  accounting  requirements 
that  railroads  coming  under  the  jurisdiction  of  the  Com- 
mission cannot  do  this  any  longer.  They  are  now 
required  to  charge  to  maintenance  the  items  which  prop- 
erly belong  there  and  can  only  put  in  improvement  or 
betterment  accounts  the  actual  expenditures  of  such 
nature.  On  the  other  hand,  if,  as  in  the  case  of  proper- 
ties like  the  Lake  Shore,  Pennsylvania  and  a  host  of 
others,  full  charges  have  been  regularly  made  to  mainte- 
nance, then  the  charging  up  of  additional  amounts  after 
payment  of  all  current  obligations  and  dividends  reflects 


Disposal  of  Surplus  171 

great  credit  on  the  management,  and  adds  to  that  extent 
to  the  efficiency  and  value  of  the  property. 

But  even  if  no  sums  are  being  currently  charged  up 
to  improvement  accounts  from  surplus,  this  is  no  reason 
why  a  road  should  uniformly  follow  a  policy  of  paying 
out  all  its  surplus  in  dividends.  As  with  any  other 
business,  a  railroad  should,  to  be  conservative,  accumu- 
late a  surplus  and  lay  aside  for  a  rainy  day.  The  roads 
which  did  this  in  the  highly  prosperous  years  of  1900  to 
1907  were  in  much  stronger  position  to  face  the  panic 
and  the  depression  which  followed  than  those  which, 
like  the  Erie  and  the  Southern,  made  dividend  payments 
which  largely  consumed  their  current  surplus  every  year. 
The  New  Jersey  Central,  the  Lackawanna,  the  Reading, 
the  Atchison,  the  Northern  Pacific,  and  the  St.  Paul 
did  not  have  to  go  into  a  tight  money  market  in  the 
winter  of  1907-08  and  borrow  millions  on  short-time 
notes  at  high  rates  of  interest  to  keep  themselves  afloat. 
They  had  conserved  their  resources  simply  by  refrain- 
ing from  the  policy  of  paying  out  the  great  sums  they 
were  making  in  dividends.  The  Pennsylvania  had  almost 
uniformly  followed  a  policy  for  more  than  forty  years 
of  paying  out  only  about  one-half  to  two-thirds  of  its 
surplus  from  year  to  year  in  dividends,  and  most  of  its 
affiliated  lines  are  doing  the  same.  So  that  as  a  matter 
of  fact  it  makes  a  very  substantial  difiference  to  the 
l)ondholders  of  a  road  as  well  as  the  stockholders  what 
is  done  with  the  surplus  remaining  after  their  demands 
have  been  satisfied.  A  bondholder  will  be  better  off  if 
the  surplus  is  not  disturbed  entirely ;  a  preferred  holder 


172  The  Income  Factors 

will  be  in  a  stronger  position  if  the  surplus  remaining 
after  his  dividend  has  been  paid  is  not  all  paid  out  in 
common  stock  dividends.  Thus  the  bondholder  and  the 
preferred  stockholder  have  a  vital  interest  in  where  the 
balance  of  surplus  goes  to.  Six  years  ago  the  Erie  first 
preferred  holders  may  have  said  they  need  not  con- 
cern themselves  about  the  way  the  second  preferred 
holders  were  being  handled,  but,  as  a  matter  of  fact, 
it  was  of  vital  importance  to  them  to  know  just  what 
was  being  done  with  these  junior  holders.  When  the 
panic  came  Erie  was  in  trouble  at  once,  and  the  first 
preferred  holders  found  themselves  in  the  same  boat 
with  the  junior  class — no   dividends   for  anybody. 

Stockholders  in  railroads  are  too  apt  to  assume,  if  a 
given  percentage  of  surplus  is  shown,  as  for  example  6  per 
cent,  that  they  are  justly  entitled  to  receive  all  or  nearly 
all  this  amount  in  dividends.  This  is  a  mistaken  idea.  Too 
many  roads  have  come  to  grief  in  the  past  by  following 
a  policy  of  over-liberal  dividend  disbursements.  A  care- 
ful distinction  should  be  made  between  the  amounts 
of  surplus  shown  which  are  really  necessary  to  retain 
as  working  capital  commensurate  with  the  normal  growth 
in  the  needs  of  the  company,  and  the  amounts  which 
may  fairly  be  disbursed  in  dividends.  Because  a  railroad 
twenty  years  ago,  with  a  very  light  business,  required 
a  reserve  of  only  a  nominal  amount,  this  is  no  reason 
why  to-day,  with  ten  times  the  business,  and  ten  times 
the  uses  for  working  capital,  it  should  continually  cripple 
itself  by  paying  out  nearly  all  its  surplus  earnings  in 
dividends.      The    merchant,    as    his    volume    of   business 


Disposal  of  Surplus  173 

grows,  steadily  increases  his  bank  balance  and  general 
reserve,  and  a  railroad  should  do  the  same. 

The  items  listed  in  railroad  reports  under  improve- 
ments usually  represent  many  charges.  Many  roads  have 
special  improvement  and  betterment  accounts;  others 
have  simply  charged  the  amounts  spent  directly,  that  is, 
for  so  much  extending,  building,  so  much  new  equip- 
ment, etc.  There  has  been  no  fixed  rule  in  the  matter. 
The  Lake  Shore,  New  York  Central,  and  some  others 
have  in  the  past,  charged  their  improvement  costs  up 
before  deducting  dividends,  thus  showing,  technically, 
but  a  narrow  margin  of  surplus  above  dividend  pay- 
ments. 


The  Capitalization  Factors 


XXVI 

The  Assets  and  Liabilities  of  the 
Railroad 

No  other  question  in  connection  with  the  railroads 
has  agitated  the  public  mind  during  recent  years  as 
has  that  of  the  capitalization  of  the  roads.  It  is  held 
in  many  quarters  that  the  railroads  of  the  United  States 
are  enormously  over-capitalized;  that  half  their  bonds 
represent  speculative  values  and  most  of  their  stocks 
water.  The  truth  of  this  assertion  is  dependent  upon 
what  we  mean  by  "water."  Measured  by  earning  capac- 
ity (the  ability  to  show  profits)  it  can  be  shown  that, 
as  a  wiiole,  the  American  railroads  are  not  over-capi- 
talized at  all.  If  we  may  say  that  a  given  piece  of  line, 
extending  from  New  York  to  Buffalo,  which  cost 
$1,000,000  to  construct  fifty  years  ago,  is  now  over- 
capitalized because  it  carries  bond  issues  aggregating 
$100,000,000  and  stock  equalling  half  as  much  again, 
then  we  must  agree  that  the  whole  world  is  in  a  state 
of  "over-capitalization."  But  we  have  already  seen  that 
the  key  to  railroad  values  is  earning  capacity  and  noth- 
ing else.  A  line  of  road  stretching  from  New  York  to 
Buffalo,  which  was  not  operating  railroad  trains  and 
transporting  passengers  and  freight  between  those  points 

(177) 


178  The  Capital  Factors 

to-day  would  be  worth  but  little  more  than  it  was  fifty 
years  ago.  Whatever  increased  value  it  might  have  now 
over  that  of  1862  would  be  in  the  right  of  way  it  owned. 
But  under  such  conditions  it  would  not  be  a  railroad 
and  such  value  would  not  be  railroad  value,  but  realty 
value.  It  would  be  a  realty  company,  and  might  be 
worth  a  few  millions  more  than  it  was  at  the  beginning. 
But  if  we  measure  the  value  by  ability  to  pay  interest 
or  profit  on  capital,  then  we  get  at  the  meat  of  the 
capitalization  question ;  at  least,  from  the  investors' 
standpoint.  Putting  our  hypothetical  railroad  to  the 
test  of  the  earning  power  of  fifty  years  ago,  we  should 
probably  find  that  on  a  capitalization  of  $20,000  per 
mile  it  earned  hardly  6  per  cent.  But  put  the  same 
line  of  road  to  the  test  of  the  earning  power  of  to-day 
and  we  should  find  that  on  a  capitalization  ten  times 
as  heavy  per  mile,  it  would  be  earning  far  more  than  6 
per  cent.  In  1863  (forty-nine  years  ago)  the  Delaware, 
Lackawanna  &  Western  reported  a  total  capitalization 
of  about  $37,000  per  mile.  On  this  capital  the  net 
earnings  in  that  year  were  slightly  in  excess  of  7  per 
cent.  In  the  year  1910,  the  same  railroad  reported 
a  total  capitalization,  including  that  of  its  leased  lines,  of 
over  $164,000  per  mile,  and,  after  deducting  invest- 
ments from  its  balance  sheet,  the  net  capital  per  mile 
was  still  more  than  $130,000.  On  this  latter  figure  the 
total  net  income  of  the  road  in  1910  was  no  less  than 
19  per  cent.  On  the  basis  of  earning  power,  then,  the 
Lackawanna  was  in  1863  over-capitalized  to  the  extent 
of  nearly  250  per  cent  as  compared  with  its  net  capital 


Assets  and  Liabilities  170 

per  mile  to-day.  To  put  the  Lackawanna  on  the  basis 
of  its  capitalization  of  1863,  we  should  have  to  increase 
the  figure  to  over  $424,000  per  mile. 

The  average  capitalization  in  par  value  of  stocks  and 
Lends  of  American  railroads  was,  for  the  year  1910, 
$18,417,132,238,  or  about  $80,000  gross  per  mile.  Of 
this  amount  $8,113,657,380  was  represented  by  stocks 
and  about  $10,303,474,858  by  bond  obligations.  In  other 
words,  the  American  railroads  as  a  whole  were  borrow- 
ing $10,303,474,858  at  various  rates  of  interest.  These 
borrowings  embraced  every  kind  of  interest-bearing 
obligation,  from  the  ordinary  straight  mortgage  bond 
to  the  temporary  loan  and  short-term  note.  The  bond 
obligations,  it  will  be  noted,  represented  considerably 
more  in  par  value  than  the  stock  issues.  But  a  substan- 
tial part  of  this  capitalization  was  owned  by  the  rail- 
roads themselves,  thus  reducing  the  amounts  outstand- 
ing in  the  hands  of  the  public  to  $5,52(),991,77H  of 
stocks  and  $8,811,584,102  of  bonds;  a  net  total  of 
$14,338,575,949  or  $62,657  per  mile. 

The  general  contention  is  made,  by  those  who  have 
given  thought  to  the  subject,  that  the  replacement 
value  of  the  American  railroads  as  a  whole  would  be 
pretty  fairly  represented  by  the  par  value  of  the  total 
bonded  debts  outstanding,  and  it  is  believed  that  a 
"physical  valuation"  of  railroad'  property  would  con- 
firm this  point  of  view;  thus  showing  that  railroad 
stocks  as  a  whole,  represent  "water." 

But  any  "physical  valuation"  such  as  has  thus  far 
been  suggested,  would  take  into  account  the  apprecia- 


ISO  The  Capital  Factors 

tion  in  the  value  of  rights  of  way,  terminal  sites,  etc., 
and  the  value  of  these  latter  things  would  doubtless  be 
found  heavy  enough  to  cover  the  entire  stock  capitali- 
zation, if  not  a  great  deal  more.  In  fact,  independent 
valuations  have  already  been  made  by  certain  of  the 
railroad  corporations  themselves,  and  in  all  cases 
where  this  has  been  done,  it  has  been  shown  that 
"physical  valuation"  is  really  in  excess  of  total  par 
values  at  the  present  time. 

All  of  which  simply  demonstrates  that  "value"  in 
railroad  property  is  measured  by  earning  power  and 
nothing  else.  Should  the  legislation  of  the  future, 
however,  proceed  upon  the  principle  that  the  "un- 
earned increment"  in  rights  of  way  and  terminal  sites 
is  not  to  be  regarded  as  the  property  of  the  railroad 
and  therefore  should  not  be  capitalized,  we  would  then 
find  that  the  great  majority  of  stocks  of  railroad  cor- 
porations would  be  practically  worthless.  For  in  such 
an  event,  capitalization  would  no  longer  be  based  on 
earning  power,  but  merely  on  replacement  value. 

Such  legislation  may  come  about  in  time,  but  for 
the  present  at  least  the  time  worn  custom  of  capitaliz- 
ing earning  power  in  corporate  forms  will  undoubtedly 
continue. 


XXVII 

The  Balance  Sheet 

Taken  as  a  whole,  probably  the  most  important  indi- 
vidual statement  in  the  railroad  report  is  the  balance 
sheet.  No  definite  idea  can  be  gained  of  the  property 
from  its  financial  standpoint  without  the  balance  sheet, 
and  if  no  other  figures  were  given  to  the  shareholders, 
this,  at  least,  would  be  of  some  assistance  to  them.  A 
balance  sheet  is  a  statement  of  the  company's  assets 
and  liabilities,  and  as  presented  publicly  it  is  usually 
in  very  condensed  form.  That  is  to  say,  while  it  con- 
tains a  large  number  of  distinct  items,  these  items  can 
usually  be  classified  under  a  few  heads  and  in  the 
statements  as  submitted  to  stockholders  only  the  total 
amounts  belonging  under  each  head  are  given.  It  is 
therefore  sometimes  difficult  properly  to  analyze  a  bal- 
ance sheet  thoroughly,  but  in  the  case  of  the  capital 
assets  and  liabilities  this  can  usually  be  done  with  a 
fair  amount  of  accuracy,  as  these  are  almost  always  large 
items  and  are  quite  clearly  stated. 

It  should  be  remembered,  however,  that  the  \alue 
of  a  balance  sheet,  like  every  other  statement  in  the 
railroad  rei)ort,  is  chiefly  relative,  and  an  examination 
of  it  without  regard  to  income  and  operating  results  is 
of  no  particular  use. 

(181) 


188  The  Capital  Factors 

A  railroad's  balance  sheet  contains  tlie  following 
definite  heads : 

Assets. 

1.  Capital  Assets. 

(a)  Property  Investment,  or  "cost  of  road  and  equipment." 

(b)  Investments   in   securities  and  other   properties. 

(c)  Sinking  funds,  etc. 

2.  Current  Assets. 

(a)  Cash  on  hand  and  on  deposit. 

(b)  Loans  and  bills  receivable, 
(f)  Accounts  receivable. 

(d)  Due  from  other  companies  and  individuals. 

(e)  Due  from  company's  agents  and  officers. 
(/)   Advances  to  other  companies. 

ig)  Sundry  items. 

Liabilities. 
1    Capital  Liabilities. 

(o)   Stock  issues  outstanding. 

(b)  Bond  issues,  including  mortgages,  real  estate  obliga- 

tions, car  or  equipment  trusts,  etc. 

(c)  Other  permanent  loans,  notes,  etc. 
2.  Current  Liabilities. 

(a)   Loans  and  bills  payable. 

(t)  Accounts  payable. 

(c)   Payrolls  and  vouchers. 

((f)  Interest  and  dividends  accrued. 

(e)  Due  to  other  companies. 

(f)  Sundry  items. 

The  balance  remaining,  after  the  offsetting  amounts 
shown  on  both  sides  in  the  above  items,  is  known  as 
"profit  and  loss,"  and  may  be  either  on  the  assets  or 


The  Balance  Sheet  18.'] 

liabilities  side,  as  the  case  may  be.  If  on  the  liability 
side,  the  profit  and  loss  item  is  known  as  surplus;  if  on 
the  asset  side  it  is  a  deficit. 

Theoretically,  at  least,  the  current  assets  and  liabili- 
ties are  supposed  to  approximately  ofTset  each  other.  In 
very  few  cases  do  they  actually  do  this,  but  unless  the 
amount  of  such  items  as  cash  on  hand  and  on  deposit, 
accounts  receivable,  etc.,  does  not  approximately  equal 
the  accounts  payable  and  amounts  due  for  interest  and 
dividends  and  to  other  companies,  it  then  means  that 
the  road  is  cramped  for  working  capital.  Another  dis- 
turbing situation  in  current  liabilities  is  to  see  the  loans 
and  bills  payable  mount  up  on  one  side  of  the  balance 
sheet,  and  such  items  as  advances  to  other  companies 
increase  in  amount  on  the  other  side.  Tiiis  simply  means 
that  the  company  is  going  into  debt  for  the  purpose  of 
helping  out  one  or  more  of  its  branch  lines  or  sub- 
sidiaries, which  may  or  may  not  be  a  good  thing.  Also, 
if  the  accounts  payable  are  increasing  in  greater  ratio 
than  the  accounts  receivable,  or  if  the  items  such  as 
"traffic  balances  due  to  other  companies"  are  growing 
more  rapidly  than  the  amounts  due  from  other  com- 
panies, the  situation  also  may  be  becoming  complicated. 
And  if,  at  any  time,  it  is  found  that  cash  on  hand  is 
declining  below  the  figures  formerly  shown  over  a  rea- 
sonable period,  it  may  mean  that  the  road  is  getting  tied 
up  with  a  shortage  of  actual  working  capital. 

Prior  to  the  establishment  of  the  Interstate  Com- 
merce Commission,  it  was  the  practice  of  many  rail- 
roads, as  in  the  case  of  mat^.y  industrial  companies  to- 


184  The  Capital  Factors 

day,  to  give  their  stockholders  no  information  what- 
ever beyond  that  contained  in  a  "condensed  balance 
sheet."  Thus,  the  only  way  the  stock  or  bondholder 
was  able  to  ascertain  whether  the  company  was  mak- 
ing any  progress  or  not,  was  to  watch  the  changes 
from  year  to  year  in  the  "profit  and  loss  surplus."  It 
will  be  realized,  in  the  light  of  what  has  been  said  in 
the  preceding  chapters,  how  very  unsatisfactory  such  a 
practice  was.  The  opportunities  for  deceiving  the 
security  holders  were  absolutely  unlimited,  for  no 
figures  v^^hatever  were  given  to  indicate  how  the  profit 
and  loss  surplus  was  created  ; — whether  the  profits  were 
the  results  of  increasing  business,  curtailment  of  main- 
tenance, income  from  outside  operations,  or  mere 
manipulation  of  accounts. 

Not  all  the  railroads  in  those  early  days  followed 
this  practice  of  secrecy,  but  many  important  ones 
did.  Until  the  early  '90s,  such  important  properties 
as  the  Lackawanna,  New  Jersey  Central  and  the  Le- 
high Valley  were  still  forcing  their  stockholders  to 
accept  "condensed  balance  sheets"  as  their  only  annual 
statement. 


XXVIII 

The   Capital   Assets 

The  largest  item  usually  shown  in  the  capital  assets 
is  the  Property  Investment  account,  formerly  called  "cost 
of  road  and  equipment."  This  account  is  supposed  to 
represent  the  actual  capital  invested  in  the  road  and  its 
equipment.  But,  as  a  matter  of  fact,  it  does  not  in  many 
cases  represent  anything  of  the  kind.  It  has  been  cus- 
tomary in  years  past  to  charge  to  this  account  various 
items,  such  as  discount  on  securities  sold,  special  financ- 
ing expenses,  expenses  for  reorganizing  the  property, 
etc.  As  was  pointed  out  by  Mr.  Woodlock,  in  his 
"Anatomy  of  a  Railroad  Report,"  published  twenty  years 
ago,  a  pronounced  example  of  the  peculiar  construction 
of  this  account  is  represented  by  the  record  of  the  old 
Atchison,  Topeka  &  Santa  Fe  road  before  the  reorgani- 
zation. The  "cost  of  road  and  equipment"  stood  at 
$95,755,207,  but  the  expert  audit  of  the  books  at  the 
time  of  reorganization  divulged  the  fact  that  over  $40,- 
000,000  stood  for  nominal  items,  such  as  discount  on 
bonds,  etc.,  and  that  less  than  half  of  this  great  total 
really  represented  money  spent  on  the  property.  The 
same  facts  could  be  demonstrated  to  more  or  less  degree 
in  connection  with  most  of  the  railroad  systems  in  this 
country  at  that  time. 

(186) 


18()  The  Capital  Factors 

It  will  be  realized,  therefore,  that  the  chief  value 
attaching  to  the  construction  account  figures  is  in  tiie 
relative  comparison  of  them  from  year  to  year.  Most 
railroad  reports  present  their  balance  sheet  in  compari- 
son with  the  figures  of  the  previous  year,  and  with  a 
series  of  reports  the  relative  changes  can  be  easily  exam- 
ined, showing  the  growth  of  this  construction  account 
and  ascertaining  just  what  the  increase  may  represent. 
Most  reports  now  furnish  an  itemized  record  each  year 
of  all  expenditures  which  are  charged  to  the  property 
investment  account  and,  of  course,  it  is  an  easy  matter 
to  see  where  this  new  money  comes  from,  whether  bor- 
rowed through  the  sale  of  bonds  or  notes,  whether 
charged  to  profit  and  loss,  or  whether  secured  by  the  sale 
of  stock. 

The  item  of  "investments  in  securities  and  other 
properties"  is  in  many  cases  of  relatively  great  impor- 
tance. Roads  which,  like  the  New  York  Central,  the 
Pennsylvania  or  the  Union  Pacific,  control  a  large  num- 
ber of  subsidiary  lines,  depend,  as  we  have  already  seen, 
to  considerable  extent  on  the  income  from  these  sub- 
sidiary lines.  This  income  comes  to  them  chiefly  in 
the  shape  of  dividends  and  interest  on  the  securities 
owned,  and  there  is  a  close  relationship  between  the 
amount  of  other  income  of  a  railroad  and  the  valuation 
of  the  securties  owned  as  carried  in  the  balance  sheet 
of  the  company.  Therefore,  the  importance  of  this 
particular  item  varies  with  the  amount  of  outside  inter- 
ests the  road  under  examination  may  happen  to  have. 

It  will  often  be  found,  on  examination,  that  the  "in- 


Capital  Assets  187 

vestments"  carried  in  a  balance  sheet  by  a  railroad  are 
heavily  overvalued,  and  that  the  income  from  these  in- 
vestments is  purely  nominal,  or  that  there  is  no  income 
at  all.  Of  course,  in  such  cases,  the  ofifsctting  items 
on  the  liability  side  of  the  statement,  such  as  the  cap- 
ital stock,  will  also  have  a  greatly  depreciated  value. 
Cases  in  point  are  the  statements  of  properties  like  the 
Wabash,  the  Missouri  Pacific,  etc.  The  stocks  of  these 
properties  sell  at  heavily  depreciated  values,  and  this 
not  wholly  because  of  the  inferior  earning  power  of 
the  roads  themselves,  but  also  because  the  earning 
power  or  income  capacity  back  of  many  of  the  "treas- 
ury securities"  is  either  very  small,  or  because  there  is 
no  income  whatever. 

The  item  of  sinking  funds  is  sometimes  of  great  and 
sometimes  of  minor  importance.  Whatever  entries  of 
this  kind  a  road  may  have  should  be  clearly  stated  so 
that  they  may  be  readily  understood,  and  so  that  it  can 
be  ascertained  just  what  condition  the  fund  may  be  in. 

Nowadays  not  many  railroad  systems  have  sinking 
funds  on  their  bonds,  and  those  that  still  have 
such  are  usually  carrying  along  unmatured  issues 
which  were  created  twenty-five  or  more  years  ago. 
The  theory  in  the  early  days  of  railroad  financing  was 
that  bond  issues  should  gradually  be  retired  through 
future  earnings,  but  as,  in  later  years,  the  growing 
earning  power  of  the  American  railroads  became  more 
and  more  the  basis  of  capitalization,  the  sinking  fund 
idea  was  gradually  abandoned.  To-day,  a  "]ier:iianent 
debt"  is  regarded  as  the  normal  thing  for  the  railroad 


188  The  Capital  Factors 

corporation,  just  as  it  has  become  in  modern  times  the 
normal  thing  for  governments  to  have  permanent 
debts.  This  process  results,  of  course,  in  capitalizing 
the  earning  power  of  future  generations,  a  custom 
which  has  become  a  cardinal  principle  of  all  modern 
corporate  enterprise.  The  wisdom  of  this  custom  is 
not  to  be  discussed  here;  its  existence  is  the  fact  to  be 
emphasized. 


XXIX 

The   Capital   Liabilities 

The  capital  liabilities  consist  chiefly  of  the  stock  and 
bond  issues  of  the  company.  Of  the  former,  there  are 
not  only  issues  of  common  and  preferred  stock  out- 
standing, but  very  often  we  find  such  items  as  debenture 
stock,  special  equipment  stock,  si)ecial  guaranteed  stock, 
or  betterment  stock,  and  it  has  not  infrequently  been 
the  case  that  a  large  railroad  will  assume  the  stock  issue 
of  a  smaller  company  and  carry  it  as  a  liability  of  its 
own,  just  as  is  done  in  the  case  of  many  bond  issues. 
Bonds  themselves  are  of  many  classes,  and,  as  has 
already  been  stated  in  these  pages,  they  carry  numerous 
qualifying  terms  and  are  of  many  distinct  types.  In 
the  case  of  practically  all  the  larger  systems  we  find 
that  numerous  bond  issues,  originally  created  by  prior 
companies,  or  by  companies  which  have  been  consolidated 
into  the  main  corporation,  are  treated  as  direct  obliga- 
tions and  carried  along  as  part  of  the  liabilities  of  the 
company. 

If  all  railroad  companies  consisted  of  single  corpora- 
tions with  no  controlled  lines,  or  if  all  the  miles  of  rail- 
road they  owned  were  directly  operated,  the  consideration 
of  the  balance  sheet  and  other  financial  statements  would 
be  comparatively  simple.     In  order  to  get  a  comparative 

(189) 


190  The  Capital  Factors 

showing  over  a  series  of  years,  and  form  judgment  of 
the  relative  position  of  the  property  with  that  of  other 
railroad  properties,  we  should  simply  need  to  reduce  the 
figures  to  the  ordinary  mileage  basis,  as  has  been  done 
in  the  examination  of  the  other  characteristics  which 
go  to  make  up  the  general  report  of  the  railroad.  But 
in  the  great  majority  of  cases,  the  investor  immediately 
meets  with  a  baffling  problem  as  soon  as  he  attempts 
to  examine  a  railroad  balance  sheet  intelligently.  In 
addition  to  the  records  given,  he  finds  that  most  railroads 
control  by  stock  ownership,  contract,  lease  or  otherwise, 
important  lines  of  road  which  they  may  or  may  not 
operate  directly,  and  in  connection  with  which  they  have 
certain  obligations  independent  of  the  ordinary  charges 
involved  in  their  regular  stock  and  bond  issues.  In  other 
words,  a  large  portion  of  the  operated  mileage  of  many 
a  railroad  system  is  made  up  of  leased  lines.  Some  of 
these  lines  are  leased  on  a  basis  of  a  fixed  rental  per 
annum ;  some  are  leased  on  a  basis  of  a  proportion  of 
net  or  gross  receipts,  and  some  are  leased  on  a  guaranty 
basis  which  may  or  may  not  change.  An  example  is 
shown  in  the  case  of  the  Pennsylvania  Railroad.  The 
Pennsylvania  Railroad  Company  reported  in  1910,  for 
its  directly  operated  lines,  3,977  miles.  Of  this  mileage, 
2,099  miles  are  owned  by  the  Pennsylvania  Railroad 
actually,  the  remaining  1,878  miles  being  operated  under 
lease  or  contract  or  used  under  trackage  rights.  Obvi- 
ously the  latter  mileage  should  be  included  in  the  income 
account  records,  as  it  has  been  directly  operated  by  the 
Pennsylvania  Railroad.    But  the  lines  controlled  by  lease 


Capital  Liabilities  191 

are  all  separate  corporations,  with  their  own  bonds  and 
stocks  outstanding,  large  portions  of  which  are  in  the 
hands  of  the  public  and  held  as  investments.  These 
bond  and  stock  issues,  however,  are  not  direct  obligations 
of  the  Pennsylvania  Railroad  in  the  sense  that  its  own 
bond  and  stock  issues  are  obligations,  and  they,  there- 
fore, are  not  shown  in  the  capital  liabilities  reported  by 
the  company  in  its  balance  sheet.  Nevertheless,  they 
cannot  be  ignored  in  an  analysis  of  the  railroad's  position 
or  results.  The  Pennsylvania  Railroad  has  leased  these 
properties  on  certain  bases,  in  consideration  of  which  it 
operates  them,  receiving  into  its  own  income  account 
whatever  profit  it  may  be  able  to  secure  as  a  result  of 
these  operations.  In  consideration  of  having  this  right  it 
pays  out  to  the  bond-  and  stock-holders  of  these  leased 
properties  certain  fixed  sums  previously  agreed  upon, 
which  take  the  nature  of  guaranties  on  stocks  and  bonds. 
These  guaranties,  or  rental  items,  are  on  all  kinds  of 
bases,  most  of  them  having  been  arranged  at  diflFerent 
periods  and  as  results  of  different  circumstances.  Thus 
we  find  that  many  leased  lines  are  controlled  through 
the  guaranty  by  the  parent  company  of  the  interest  and 
principal  of  the  bond  issues  alone ;  others  are  controlled 
through  the  guaranty  of  certain  dividends  on  stocks  as 
well  as  the  interest  on  the  bonds,  while  still  others  are 
controlled  through  guaranty  of  specific  amounts  which 
are  used  by  the  rented  property  for  meeting  current 
obligations  of  interest  and  dividends.  In  the  case  of 
the  Pennsylvania  Railroad,  the  rental  cliarges  against  its 
general  income  amounted  in  1910  to  $7,652,272,  so  that 


192  The  Capital  Factors 

It  will  be  seen  that  in  this  instance  the  item  of  rentals 
is  practically  as  important  a  part  of  the  fixed  charges 
as  is  the  interest  on  its  own  direct  bonded  debt. 

As  this  item  of  rentals  in  the  operating  results  of 
railroads  is  such  an  important  factor,  it  will  be  realized 
that  unless  it  is  in  some  way  taken  into  consideration  in 
the  examination  of  the  balance  sheet  of  the  company, 
it  would  not  be  possible  to  make  any  analysis  of  the  bal- 
ance sheet  in  an  intelligent  way.  In  other  words,  were  we 
to  examine  the  totals  shown  in  the  capital  items  of  the 
balance  sheet  alone,  and  then  examine  the  net  income 
results  to  see  what  percentage  of  net  income  or,  in  fact, 
of  gross  income,  or  any  other  income,  were  shown  on  the 
capital  of  the  road,  we  should  get  very  grotesque  results 
if  we  did  not  in  some  way  consider  tlie  fact  that  the 
rented  properties  themselves  have  stocks  and  bonds  on 
which  interest  and  dividends  must  be  paid. 

If  we  examine  the  income  and  capitalization  record 
of  the  Lackawanna,  the  relative  importance  of  consider- 
ing the  rental  items  in  connection  with  the  balance  sheet 
will  be  seen.  The  Lackawanna  itself  now  has  only  a 
nominal  bonded  debt.  Its  fixed  charges,  however,  have 
averaged  during  the  past  ten  years  more  than  $8,600 
per  mile,  far  more  than  80  per  cent  of  these  charges 
having  been  made  up  of  rental  items  on  leased-line 
securities.  These  items  have  been  of  various  kinds ;  some 
guaranties  on  bond  issues,  many  on  stock  issues.  The 
outstanding  capital  of  the  Lackawanna  in  1910,  as  re- 
duced to  the  mileage  bases  of  the  operated  system,  was 
about   $37,000   per   mile.      The    amount    of    investments 


Capital  Liabilities  193 

owned  by  the  company,  as  shown  in  its  balance  sheet, 
was  about  $33,700  per  mile.  Xuw,  if  we  considered  no 
other  capital  items  and  disregarded  the  securities  of 
leased  lines,  not  shown  in  the  balance  sheet,  we  should 
have  a  net  capital  per  mile  for  the  Lackawanna  system 
of  only  $3,300.  As  the  road  earned  in  gross  in  1910 
over  $44,000  per  mile,  this  would  mean  that  it  was  each 
year  earning  far  more  than  ten  times  its  net  capital,  and 
as  its  total  net  income  was  $25,000  per  mile,  it  would 
imply  that  the  net  income  of  the  system  at  the  present 
time  was  equivalent  to  700  per  cent  on  the  capital 
outstanding.  The  absurdity  of  this  conclusion  is  apparent, 
but  nevertheless,  it  would  be  a  logical  deduction  from 
the  figures  given  in  the  balance  sheet  and  income  account, 
with  the  securities  of  the  rented  properties  disregarded. 
The  item,  "Other  permanent  loans,  notes  etc.,"  as 
shown  in  the  list  of  capital  liabilities  on  page  182, 
embraces  generally  such  items  as  short  term  notes, 
special  advances  from  bankers,  etc.,  which  the  railroad 
has  been  obliged  to  secure  for  some  capital  use.  It 
might  be  assumed  that  such  items  should  be  included 
in  "floating  debt"  and  sometimes  this  is  the  correct 
thing  to  do.  But  as  a  rule,  the  short  term  notes  should 
be  included  in  the  permanent  capital  liability  account, 
for  in  practically  all  cases,  short  term  obligations  of 
railroads  are  sooner  or  later  converted  into,  or  ex- 
changed for,  some  fixed  bond  obligation.  The  short 
term  note  issue  is  usually  resorted  to  by  the  railroad 
in  times  of  poor  investment  demand,  when  it  is  dif- 
ficult to  dispose  of  a  long  term  bond  at  a  fair  price.     It 


194  The  Capital  Factors 

is  generally  expected  that  before  the  maturity  of  these 
notes  investment  conditions  will  improve  to  the  extent 
of  enabling  the  corporation  to  float  some  fixed  obliga- 
tion, or  to  issue  additional  capital  stock. 

The  equipment  trust,  the  principal  of  which  is, 
theoretically,  to  be  paid  out  of  earnings,  is,  as  a  matter 
of  fact,  in  numerous  cases  finally  retired  by  the  issue 
of  bonds  or  stock.  This  is  an  unsound  practice,  and 
should  never  be  resorted  to,  for  in  the  course  of  time 
the  earning  power  of  equipment  declines  and  finally 
vanishes,  and  when  that  time  has  arrived,  and  the 
equipment  is  relatively  worthless,  there  should  cer- 
tainly be  existing  no  capital  obligation  against  it. 

Not  all  the  railroads  follow  this  bad  practice,  but  in 
recent  years  a  considerable  number  have  been  guilty 
of  it  to  a  more  or  less  degree.  Where  this  is  done  on 
any  large  scale,  the  investor  should  regard  it  as  a 
distinct  danger  signal. 


XXX 

Capitalization  of  Rentals 

The  problem  of  analyzing  the  capital  items  of  leased 
lines  in  a  manner  for  admitting  of  ready  comparison, 
has  been  a  difificult  one.  As  the  term  of  leases,  both  in 
length  of  time  and  in  amount  of  rental,  are  so  varied 
and  as  the  figures  given  in  different  reports  regarding 
these  terms  and  payments  are  so  incomplete,  some  arbi- 
trary method  must  necessarily  be  adopted  for  reducing 
them  to  a  comparative  basis.  In  the  case  of  some  com- 
panies all  the  different  rental  items  are  separately  stated, 
and  it  is  a  very  simple  matter  to  ascertain  their  amount 
and  treat  them  accordingly.  But  this  is  not  the  case 
in  most  instances  and,  therefore,  in  making  compari- 
sons of  the  capital  factors,  the  uniform  policy  should  be 
adopted  of  capitalizing  the  rental  obligations  of  the 
operating  companies  at  5  per  cent.  An  approximate 
estimate  of  a  large  number  of  rental  obligations  in- 
dicates that  5  per  cent  is  a  fair  and  conservative  basis 
for  a  purpose  of  this  kind,  and  it  is  believed  it  ap- 
proaches the  actual  condition  more  closely  than  a 
lower  percentage  would.  Examinations  of  instances 
where  the  items  are  furnished  in  reports  will  show  that 
the  5-per-cent  basis  is  in  no  case  very  far  out  of  the 
way. 

195 


196  The  Capital  Factors 

It  might  be  contended  by  some  that  a  more  accurate 
method  for  capitahzing  the  rentals  in  a  comparative  analy- 
sis would  be  to  simply  add  up  the  stocks  and  bonds  of 
tlie  rented  properties,  and  reduce  them  to  the  mileage 
basis  and  include  them  in  a  table.  But  in  many  cases 
this  would  be  most  illogical  and  misleading.  The  differ- 
ent leased  lines  which  the  operating  companies  control 
have  usually  been  acquired  on  a  basis  which  has  disre- 
garded the  par  value  of  their  own  capitalization,  and 
has  been  arrived  at  more  or  less  on  a  basis  of  earning 
power.  Thus,  it  is  found  that  in  many  cases  a  leased 
line  may  have  been  acquired  through  a  guaranty  of  its 
bond  issues  only,  thus  leaving  the  stock  issue  of  that 
leased  line  without  dividends  and  without  hope  of  any 
return  as  long  as  the  lease  is  in  operation.  Obviously, 
in  this  case,  the  stock  of  the  leased  line,  receiving  no 
return  whatever,  and  not  having  any  control  of  the 
property  during  the  life  of  the  lease,  will  be  worth  a 
nominal  sum  only.  On  the  other  hand,  there  are  many 
cases  where  a  line  has  been  considered  of  so  much  value 
to  the  leasing  company  that  the  latter  has  guaranteed 
some  high  rate  of  dividend,  such  as  10  per  cent  or  15 
per  cent  on  the  capital  of  the  leased  road  for  a  long 
series  of  years.  In  such  an  instance  the  value  of  the 
stock  of  that  property  will  naturally  be  far  higher  than 
its  par  value  as  measured  by  income  return,  which  will 
mean  that  the  capital  obligation  on  the  leased  line,  for 
which  the  parent  company  is  responsible,  may  be  in 
effect  far  higher  than  the  par  value  of  the  securities 
of  the  leased  line.     So  we  find  that  here,  as  everywhere 


Rentals  197 

else  in  the  railroad  report,  the  true  valuations  are  based 
on  earning  capacity  and  income  results,  rather  than  on 
the  mere  nominal  amounts  given  in  the  face  values  of 
the  stocks  and  bonds.  , 

To  return  again  to  our  illustration  of  the  Lacka- 
wanna capital  showing.  The  Lackawanna  operated  in 
1910  815  miles  of  road,  including  the  mileage  of  the 
leased  lines,  all  of  which  have  their  own  bonds  and 
stocks  outstanding,  and  on  which  in  most  cases  the 
Lackawanna  road  has  made  certain  guaranties.  The 
figures  of  gross  and  net  income  included  in  the  income 
account  are  the  results  of  operation  on  these  815  miles 
of  road.  Therefore,  we  must  find  the  obligation  of  the 
Lackawanna  Company  in  some  way  in  the  financial  state- 
ment or  balance  sheet,  which  will  give  a  proper  idea  of 
the  actual  liabilities  in  capital  items  of  the  Lackawanna 
Railroad.  By  capitalizing  on  a  basis  of  5  per  cent  all 
the  rentals  for  which  the  Lackawanna  is  responsible, 
we  find  that  as  reduced  to  the  mileage  basis  of  the 
operated  system,  the  Lackawanna  rentals  (as  thus  capi- 
talized) amount  to  about  $126,600  per  mile.  We  have 
already  shown  that  the  other  capital  items  of  the  Lacka- 
wanna amounted,  after  the  deduction  of  the  invest- 
ments of  the  company,  to  $3,300  per  mile,  thus  giving 
as  an  approximate  net  capitalization  for  the  railroad 
system,  a  figure  of  about  $130,000  per  mile.* 

•  This  method  of  capitalizing  the  rentals  at  S  per  cent,  adding  thii 
capitalized  liability  to  the  other  capit.il  liabilities  in  the  balance  sheet, 
and  treating  this  as  the  gross  capital  "f  the  company,  has  been  followed 
in  "Moody's  .\nalyses."  To  arrive  at  a  net  figure  the  investments  of  the 
company  have  been  deducted  from  the  gross  capital,  the  balance  remain- 
ing being  approximately  the  amount  of  cafiital  value  on  which  the  railro.id 
must  make  a  net  income  return.     An  examination  of  the  .\nalyses  in  the  volume 


198  The  Capital  Factors 

There  are,  of  course,  many  instances  where  prop- 
erties have  no  rental  items  whatever  which  can  be 
capitalized,  or  which  should  be  included  in  the  general 
capitalization  figures.  Rentals  of  tracks,  terminal 
facilities,  buildings,  etc.,  are  distinct  from  the  ordinary- 
class  of  rental  obligations.  Like  the  rental  of  equip- 
ment, such  items  as  these  are  of  a  very  fluctuating 
nature  and  while  one  year  they  may  amount  to  a  con- 
siderable sum,  another  year  they  may  be  only  nominal. 
But  where  a  branch  line  is  held  by  a  long  term  lease, 
and  the  rental  compensation  is  more  or  less  fixed 
throughout  a  long  series  of  years,  then  the  only  thing 
to  do  with  such  a  charge  is  to  capitalize  it  as  a  part 
of  the  gross  capitalization  of  the  company. 


will  show  the  great  differences  in  the  classes  of  capital  figures.  It  will 
show  that  in  many  cases  the  rentals  are  merely  nominal  and  do 'not  affect 
the  general  result  at  all,  while  in  other  instances  they  are  by  far  the  most 
important    factor. 


XXXI 
stocks  and  Bonds  Outstanding  Per  Mile 

Like  the  earnings  figures  of  the  railroads,  there  is 
vast  variation  in  the  amounts  of  capital  outstanding 
on  the  different  systems.  This  fact  is  naturally 
brought  to  light  more  definitely  by  a  consideration  of 
the  figures  on  the  mileage  basis.  As  so  reduced,  many 
remarkable  facts  of  variation  are  brought  definitely 
into  vievv^.  Stock  outstanding  per  mile  varies  on  dif- 
ferent roads  all  the  way  from  $5,000  up  to  more  than 
$100,000  per  mile,  but  as  already  pointed  out,  the 
amount  per  mile  really  has  no  relation  to  the  question 
of  "over-capitalization"  per  se.  A  railroad  with  stock 
outstanding  at  the  rate  of  $10,000  per  mile  may  easily 
be  far  more  heavily  "over-capitalized"  than  one  with 
stock  outstanding  of  $50,000  per  mile — assuming,  of 
course,  that  we  measure  value  on  the  income-producing 
basis,  which  really  is  the  way  in  which  it  is  measured. 
For  example,  the  Wisconsin  Central,  with  stock  out- 
standing at  the  rate  of  $27,000  per  mile,  is  far  more 
heavily  capitalized,  as  measured  by  income  results, 
than  the  Reading  Company  with  stock  outstanding  at 
the  rate  of  $140,000  per  mile. 

A  comjiarison  of  the  stocks  outstanding  per  mile 
on    the    different    roads    during    a    series    of   years    is 

199 


200  The  Capital  Factors 

chiefly  valuable  in  showing  the  changes  from  year  to 
year  and  also  in  showing  the  relative  amounts  of  bonds 
and  stocks  as  well  as  the  proportion  of  stock  to  the 
entire  net  capital  of  the  road.  It  is  interesting  to  note 
that  the  position  of  many  properties  has  undergone 
pronounced  change  in  his  respect  during  the  past  ten 
years.  The  Atlantic  Coast  Line,  for  example,  reported 
in  1901  a  total  capitalization  made  up  to  the  extent  of 
60  per  cent  in  stock  issues.  During  the  years  following 
the  stock  issues  declined  in  amount,  not  only  in  rela- 
tion to  the  mileage  operated,  but  also  in  relation  to  the 
total  capital  liabilities  of  the  road,  and  in  1908  the 
stock  outstanding  represented  but  23  per  cent  of  the 
total  amount  of  stocks  and  bonds.  Often  we  find  that 
the  decline  in  the  stock  issues  is  offset  in  direct  ratio 
by  increase  in  the  bond  issues.  At  other  times  the 
offsetting  increase  is  in  rental  charges  or  in  declines 
in  the  amounts  of  securities  held  in  the  balance  sheet. 
Conversely,  where  the  stock  outstanding  has  increased 
in  pronounced  proportion,  a  relative  change  of  some 
kind,  resulting  in  at  least  a  partial  offset,  is  shown  in 
the  decline  in  the  bond  obligations,  or  in  the  rentals, 
or  possibly  in  an  increase  in  the  amounts  of  securities 
owned. 

It  will  be  seen  that  a  healthy  trend  in  this  com- 
parative capitalization  showing  is  naturally  character- 
ized by  a  declining  percentage  in  the  bonds  outstand- 
ing. If  the  bond  issues  are  declining  in  amount  per 
mile,  it  means  that  the  fixed  charges  are  also  declin- 
ing, unless,  of  course,  the  rental  items  are  growing.    It 


Stocks  and  Bonds  Outstanding  Per  Mile        201 

is  much  better,  for  the  railroad's  position  and  credit,  to 
issue  non-interest-bearing  obligations  if  it  can,  and 
generally  speaking  those  roads  which  have  made  their 
extensions  and  carried  on  their  developments  during 
recent  years  through  the  issue  of  capital  stock  are  in 
much  better  position  than  those  which  have  uniformly 
followed  the  policy  of  issuing  bonds.  This  ruling 
does  not  always  hold,  but  is  sound  as  a  general  propo- 
sition. 

There  are  two  conditions  under  which  a  railroad 
may  be  justified  at  a  given  time  in  issuing  bonds  for 
improvements  and  extensions  rather  than  stocks.  One 
of  these  is  in  the  case  of  those  properties  the  earning 
power  of  which  has  not  reached  a  point  where  good 
dividends  are  being  earned  on  the  stocks,  and  where 
the  latter  are  selling  at  depreciated  values.  The  only 
way  the  road  can  raise  money  is  by  the  issue  of  bonds, 
and  it  must  cither  do  the  latter  or  not  spend  any 
money  at  all.  The  other  situation  is  where  a  road  of 
high  credit  can.  in  times  of  easy  money,  put  out  a 
long-term  obligation  at  a  low  rate  of  interest.  In- 
stances of  the  latter  have  been  reflected  in  the  policy 
of  the  Illinois  Central  in  years  gone  by,  and  also  more 
recently  by  the  Pennsylvania. 

As  a  general  proposition,  however,  it  is  much  better 
for  a  railroad  to  issue  stock  if  it  can.  In  the  past  few 
years  the  St.  Paul,  the  Chicago  &  North  Western,  and 
the  Canadian  Pacific  have  adopted  this  policy  with 
most  satisfactory  results.  The  Canadian  Pacific,  for 
example,  increased  its  stock  outstanding  from  $12,850 


202  The  Capital  Factors 

per  mile  in  1898,  to  $20,192  per  mile  in  1908,  its  bonds 
outstanding  at  the  same  time  declining  per  mile  about 
10  per  cent,  and  its  rentals  changing  but  nominally. 
The  net  result  of  this  policy  has  been  that  the  fixed 
charges  are  now  no  more  per  mile  than  they  were  ten 
years  ago,  and  the  road  has  been  finding  it  easier  to 
pay  10  per  cent  on  its  common  stock  in  recent  years, 
than  it  did  to  pay  4  per  cent  on  this  stock  in  1899.  The 
credit  of  the  company  is  in  every  sense  stronger,  and 
as  its  bond  issues  now  represent  only  about  45  per 
cent  of  its  total  gross  capital  as  compared  with 
58  per  cent  ten  years  ago,  it  will  be  realized  that,  as  a 
whole,  the  equity  in  the  property  which  is  owned  by 
the  stockholders  has  very  greatly  increased. 

In  making  comparisons  of  this  kind  the  total 
amounts  outstanding  should  be  included  for  each 
year.  Among  the  bond  issues  should  be  included 
in  all  cases  such  items  as  equipment  trust  obligations, 
loans  on  realty  or  on  other  property,  short-term 
note  issues,  etc.  During  th  '  past  few  years,  the 
railroads  have,  in  many  cases,  issued  notes  run- 
ning from  two  to  five  years,  which  while  not  mort- 
gages, and  in  a  sense  temporary  obligations,  will 
in  all  cases  be  sooner  or  later  replaced  by  permanent 
capital  obligations  of  one  kind  or  another.  Therefore, 
they  should  be  treated  as  capital,  rather  than 
current  obligations,  in  any  relative  consideration  of 
the  financial  condition  of  the  company.  In  making 
comparison  with  other  properties  it  must  be  remem- 
bered that  the  same  conditions  for  comparison  which 


Stocks  and  Bonds  Outstanding  Per  Mile       203 

apply  to  the  Physical  and  Income  Factors,  do  not 
necessarily  apply  to  the  Capital  Factors  of  a  railroad. 
In  examining  the  "capital  factors",  we  are  specially 
interested  in  ascertaining  the  relationship  between  the 
net  value  of  the  capital  (which  means  the  worth  of  the 
property)  to  the  earning  power  shown.  It  is  therefore 
an  easy  matter  to  compare  the  capital  figures  of  the 
Union  Pacific  with  the  Pennsylvania,  or  of  the  Louis- 
ville &  Nashville  with  the  New  Haven.  By  ascertain- 
ing the  percentage  of  net  income  shown  on  net  capital, 
we  can  see  relatively  whether  the  New  Haven  property 
is  doing  better  or  has  done  better  on  its  average  net 
capital  over  a  period  than  has  the  Louisville  &  Nash- 
ville on  its  own  average  net  capital.  We  can  in  this 
way  judge  as  to  the  relative  financial  strength  and  con- 
dition and  general  standing  of  both  of  the  companies. 
Thus  we  can  compare  the  capital  figures  one  with 
another  as  a  whole.  But  we  can  also  compare  the  in- 
dividual items.  A  comparison  of  the  bond  liabilities  on 
the  New  Haven  property  with  the  bond  liabilities  on 
the  Union  Pacific  property,  will  bring  into  prominence 
certain  striking  differences.  While  the  Union  Pacific 
bonded  debt  has  shown,  in  the  face  of  great  growth  in 
volume  of  business  during  the  ten  years,  a  declining 
tendency,  the  bonded  debt  in  the  New  Haven  shows,  in 
the  face  of  only  a  moderate  growth  in  business,  an  in- 
crease of  about  800  per  cent  as  measured  on  the  mile- 
age basis.  This  simply  means  that  while  the  L^nion  Pa- 
cific has  decreased  its  charges  per  mile,  and  increased 
its  margin  of  safety  very  heavily,  the  New  Haven  has 


204  The  Capital  Factors 

increased  its  fixed  charges  enormously,  and  that  al- 
though its  growing  business  has  held  up  the  margin  of 
safety  on  its  bond  issues  to  some  extent,  the  margin  on 
its  stock  issue  has  been  greatly  reduced  in  the  past  few 
years.  An  investor  in  the  stocks  of  either  of  these 
companies  would  naturally  reach  the  conclusion  that, 
on  the  showing  here  made,  the  Union  Pacific  is  clearly 
more  certain  of  paying  its  dividend  of  10  per  cent  per 
annum  than  is  the  New  Haven  of  continuing  its  8-per- 
cent rate.  All  things  considered,  the  Union  Pacific 
common  stock  at  $1G0  per  share,  therefore,  looks  far 
more  attractive  to  the  investor  than  the  New  Haven 
stock  at  the  present  price  of  $136  per  share. 

The  analyses  of  the  bond  issues  of  the  different 
systems  are  somewhat  difficult  to  make.  In  many 
cases  issues  have  been  assumed  on  branch  lines  which 
have  been  consolidated  with  the  main  company,  and 
on  which  interest  may  have  been  guaranteed.  Where 
a  bond  issue  has  been  guaranteed  on  a  separately  oper- 
ated property,  which  is  not  leased,  the  amount  should 
be  included  in  the  bond  debt  and  not  among  the 
rentals.  This  would  be  the  case  with  the  New  Haven, 
where,  in  the  past  few  years,  many  acquisitions  have 
been  made  in  properties  outside  of  the  leased  lines 
and  the  railroad  system  itself.  Many  of  these  bond 
issues  have  been  assumed  and  guaranteed,  but  the 
properties  have  not  been  leased  in  the  ordinary  sense. 

Sufficient  has  already  been  said  regarding  the 
rentals  and  the  plan  for  capitalizing  them  at  5  per  cent, 
and  it  will  not  be  necessarv  to  make  further  extended 


Stocks  and  Bonds  Outstanding  Per  Mile        '.'05 

comment  here.  Railroad  reports  show  many  interest- 
ing changes  in  these  figures  from  year  to  year.  Most 
of  the  older  roads  in  the  Eastern  States,  and  some  in 
the  Southern  States,  have  \cry  important  rental  obli- 
gations, while  on  roads  west  of  Chicago  and  Cincinnati 
the  rental  items  are  usually  of  a  nominal  nature.  The 
New  Haven,  the  New  York  Central,  Pennsylvania,  the 
Reading,  and  the  Erie,  all  report  extremely  heavy 
rental  liabilities,  while  roads  like  the  St.  Paul,  Atchi- 
son, Union  Pacific,  and  Great  Northern  have  practi- 
cally no  rental  obligations  whatever. 


XXXII 

Net  Capitalization 

As  already  pointed  out,  the  only  practical  method 
ior  getting  at  an  approximate  figure  for  showing  the 
true  capitalized  value  of  the  railroad,  is  to  take  into 
consideration  the  investments  or  securities  owned 
which  are  reported  by  the  company  in  its  balance 
sheet.  Sometimes  these  securities  owned  consist  of 
stocks  and  bonds  of  the  system  itself;  sometimes  they 
consist  of  issues  of  branches  or  leased  lines,  while  in 
other  instances  they  may  consist  of  securities  of  roads 
which  are  entirely  independent.  Securities  held  by 
railroad  companies  represent  various  conditions.  On 
the  Pennsylvania  Railroad  we  find  that  its  securities 
owned  run  into  very  large  sums  and  that  the  return 
in  interest  and  dividends  on  these  securities  is  a  very 
important  factor  in  the  income  account.  It  is  fre- 
quently the  case  that  a  railroad  company  will  own  all, 
or  nearly  all,  of  the  bonds  or  stocks  of  a  leased  or 
controlled  line,  and  will  receive  the  income  produced 
by  its  own  guaranty  on  the  securities  which  it  owns. 
In  such  case  the  item  must  of  course  appear  on  both 
sides  of  the  statement,  and  where  a  lease  has  been 
capitalized  at  5  per  cent,  it  may  be  that  a  portion  of 
this  capitalized   item   is  offset  by  items  in   securities 

207 


208  The  Capital  Factors 

owned.  This,  however,  does  not  change  the  net 
result. 

While  the  policy  of  investing  in  securities  was 
begun  by  the  railroads  for  the  purpose  of  acquiring 
or  controlling  branches  and  feeders,  this  policy  has 
in  recent  years  enlarged  to  a  vast  extent,  and  we  now 
find  great  railroad  systems  owning  securities  of  other 
railroad  properties  which  seem  in  no  way,  in  a  traffic 
sense,  to  have  any  real  relationship.  Thus  we  find  that 
the  Union  Pacific  has  virtual  control  of  the  Baltimore 
&  Ohio  system,  enabling  it,  with  the  Lake  Shore 
interests,  to  control  the  Reading  Company  and  the 
Central  Railroad  of  New  Jersey.  The  Union  Pacific 
also  has  heavy  interests  in  the  New  York  Central 
property,  in  the  St.  Paul,  and  in  the  Chicago  and 
North  Western.  These  investments  have  been  ac- 
quired for  other  purposes  than  that  of  merely  pro- 
ducing income,  and  this  latter  fact  and  the  relative 
worth  to  the  road  as  a  whole,  must  be  taken  into  con- 
sideration when  we  examine  the  securities  owned  in 
connection  with  the  amounts  of  other  income  of  the 
roads. 

The  "net  capitalization"  of  a  railroad  property 
can  always  be  ascertained  by  the  following  simple 
method.  First,  add  together  the  amount  of  stocks, 
bonds,  notes,  equipment  trusts,  floating  obligations. 
etc.,  which  are  outstanding.  Then  turn  to  the  income 
account  and  ascertain  the  amount  of  money  paid  out, 
as  a  part  of  the  fixed  charges,  for  rentals  of  leased 
lines.    These  rentals  may  be  in  the  shape  of  dividends 


Net  Capitalization  200 

guaranteed  on  leased  line  stocks,  interest  guaranteed 
on  leased  line  bonds,  or  simple  payments  of  money 
as  "rental."  Sometimes  lines  are  leased  on  a  percent- 
age of  gross  or  net  earnings  of  the  leased  line  itself. 
In  this  case  the  item  will  appear  in  the  fixed  charge 
as  "rental"  for  such  and  such  a  line,  Having  ascer- 
tained the  total  amount  of  rental  payments  for  the 
given  year,  capitalize  this  sum  at  5  per  cent  (that  is, 
multiply  the  total  by  20),  and  then  add  the  result  to 
the  total  direct  capital,  as  represented  by  the  amount 
of  outstanding  stocks  and  bonds  of  the  main  system. 
The  aggregate  will  give  the  gross  capitalization  of 
the  railroad. 

Then  turn  to  the  asset  side  of  the  balance  sheet  and 
ascertain  the  amount  of  the  security  investments  re- 
ported by  the  company.  This  may  be  in  one  item  or 
it  may  be  in  several.  \\'hatever  the  amount  is,  deduct 
it  from  the  gross  capitalization  already  ascertained, 
and  the  balance  remaining  over  will  give  the  Net 
Capitalization  of  the  property. 

To  give  a  concrete  illustration  of  the  process,  let 
us  take  the  balance  sheet  of  the  Denver  &  Rio  Grande 
for  the  fiscal  year  1911.  The  total  stock  and  bonded 
outstanding  were  $205,010,800.  The  company  reported 
no  separate  rentals  of  leased  lines,  for  although  it 
guarantees  interest  on  certain  bonds,  these  bonds  arc- 
included  in  the  debt  of  the  company  itself.  It  did. 
however,  report  $29,520,473  of  securities  held  as  in- 
vestments, and  this  amount  should  be  deducted  from 


210  The  Capital  Factors 

the  gross  capital,  thus  giving  the  net  capital  of  the 
company  as  $176,090,227. 

For  comparative  purposes,  this  net  capital,  with  the 
different  items  comprising  it,  can  be  reduced  to  the 
mileage  basis  of  the  system,  and  when  this  is  done, 
the  percentage  of  net  income  per  mile,  as  explained 
in  the  following  chapter,  can  at  once  be  ascertained. 


XXXIII 

Net  Income  on  Net  Capital 

The  net  capital  of  a  railroad  furnishes  us  with  the 
approximate  worth  of  the  property,  and  enables  us  to 
compare  this  approximate  worth  with  the  earning 
capacity  shown.  Thus  we  have  a  method  at  hand 
whereby  we  can  at  a  glance  ascertain  whether,  in  face 
value,  the  railroad  is  or  is  not  over-capitalized.  By 
comparing  the  net  income  per  annum  with  the  ap- 
proximate net  capital,  we  get  a  distinct  view  of  the 
financial  standing  and  strength  of  the  property.  If  its 
net  income  on  this  net  capital  is  above  the  average 
return  and  in  the  record  shows  an  improving  trend, 
we  know  at  once  that  the  financial  strength  of  the 
property  is  favorable.  On  the  other  hand,  if  we  finfl 
a  declining  tendency  present  or  find  that  the  i)crcent- 
age  on  the  net  capital  is  abnormally  low.  then  it 
simply  means  that  the  road  is  over-capitalized,  as 
measured  by  the  par  value ;  that  its  resources  are 
small,  and  that  its  earning  power,  from  the  standpoint 
of  the  security-owners,  is  relatively  weak.  Compari- 
son of  this  figure  with  the  Margin  of  Safety,  (already 
discussed  in  a  previous  chapter),  gives  at  a  glance  the 
general  key  to  the  condition  of  the  entire  property. 
The  Margin  of  Safety  enables  the  bondholder  to  know 

•jn 


212  The  Capital  Factors 

the  position  of  the  bonds  in  the  income-producing 
capacity,  as  far  as  his  interest  is  concerned,  while  the 
Net  Income  on  Net  Capital  is  of  vital  interest  to  every 
security-holder,  whether  he  is  in  the  position  of  a 
bondholder  or  stockholder. 

Many  of  the  railroads  in  the  United  States  present 
remarkable  records  in  growth  of  earning  power  dur- 
ing the  past  ten  years,  and  in  the  face  of  large  in- 
creases in  capital  obligations  have  shown  a  steady 
expansion  of  the  percentage  of  net  income  on  the  net 
capital  for  many  years.  Other  roads,  on  which  the  net 
capital  has  declined,  as  measured  on  the  mileage  basis, 
have  of  course  shown  a  larger  percentage  of  net  in- 
come on  this  smaller  net  capital  without  having 
materially  increased  their  total  net  income.  The 
Central  of  Georgia  reported  for  the  decade  ending  with 
1908  a  decline  in  its  net  capital  per  mile  from  $35,283 
to  $28,395.  In  the  first  year  the  total  net  income 
equalled  4.4  per  cent  on  its  capital,  while  in  1908  it 
reported  6.1  per  cent.  Yet  in  1908  the  total  net  in- 
come per  mile  was  $1,723  in  comparison  with  $1,458  in 
1899,  an  increase  of  only  about  20  per  cent.  But 
because  of  the  reduction  in  the  net  capital  outstanding, 
the  road  was,  of  course,  in  a  much  stronger  financial 
position  in  the  latter  year  than  in  the  former. 

Most  of  the  American  railroads  present  during  the 
past  decade  an  excellent  record  in  their  capitalization 
figures,  as  they  do  in  income-producing  comparisons. 
Only  a  small  number  have  shown  an  inability  to  keep 
their  Capital  Factors  in  proper  relation  to  income  re- 


Net  Income  on  Net  Capital  213 

suits,  and  while  during  the  decade  vast  issues  of 
securities  have  been  created  by  all  the  progressive 
systems,  and  in  many  cases  the  capital  liabilities  have 
doubled  or  more  than  doubled,  yet  there  are  but  few 
instances  where  these  increases  have  grown  faster 
than  the  relative  growth  in  earning  power. 

The  railroads  which  are  in  the  weakest  position 
in  their  cajntal  factors  arc  naturally  properties  of  the 
type  of  the  Detroit,  Toledo  &  Ironton,  which  began 
their  career  with  exceedingly  heavy  capital  items,  and 
therefore  have  been  handicapped  in  their  operating 
efforts  from  the  start.  The  Detroit,  Toledo  &  Ironton 
reported  a  net  capital,  in  1!)()H.  of  about  $88,000  per 
mile,  on  which  it  earned  little  more  than  1  per  cent. 
This  capitalization  was  double  that  of  the  Lake  Erie 
&  Western,  and  40  per  cent  higher  than  that  of  the 
Wabash,  and  while,  if  the  road  had  had  a  capital  not 
higher  than  that  of  the  Lake  Eric  &  Western,  it 
might  have  made  a  very  fair  showing  in  recent  years, 
with  the  enormously  heavy  load  to  carry  which  these 
figures  reflect,  it  had  no  opportunity  at  all  of  getting 
on  its  feet.  As  its  income  record  shows  it  has  never 
earned  a  surplus,  and  during  the  past  five  years  has 
regularly  reported  a  heavy  deficit  under  its  charges. 

Properties  like  the  Erie,  which  carry  enormously 
heavy  capitalizations,  must,  as  a  rule,  show  a  compara- 
tively high  return  on  their  capital  to  maintain  good 
credit  and  present  a  satisfactory  record.  Examina- 
tion of  the  Erie  reports  will  show  the  load  which  the 
Erie  is  obliged  to  carry  in  the  matter  of  capitalization. 


214  The  Capital  Factors 

In  1899  its  net  capital  was  at  the  high  figure  of  $117,- 
318  per  mile,  of  which  $G6,580  was  represented  by  bond 
obligations  and  $13,700  by  rentals,  all  these  items 
carrying  definite  fixed  charges.  Its  securities  owned 
in  that  year,  while  carried  at  a  valuation  of  $44,000 
per  mile,  were  worth  far  less  than  this,  as  the  other 
income  is  shown  to  have  been  but  $300  per  mile  that 
year.  During  the  ten  years  which  succeeded,  the  net 
capital  of  the  Erie  increased  to  $146,741,  but  the  pro- 
portion of  stocks  and  bonds  radically  changed,  the 
bonds  outstanding  growing  to  $108,562  per  mile,  while 
the  rentals  moderately  declined.  The  securities 
owned  in  1908  amounted  to  $52,000  per  mile,  but  were 
apparently  not  worth  this  in  income-producing  power 
to  the  road,  as  the  other  income  was  still  of  a  com- 
paratively nominal  amount.  Therefore,  it  will  be 
seen  that  the  fixed  obligations  of  the  company  had 
increased  far  more  per  mile  than  the  net  capital  had 
grown,  and  when  a  setback  came  in  earnings  in  1908, 
the  company  was  in  no  position  even  to  meet  its  fixed 
charges,  the  latter  having  grown  nearly  50  per  cent 
beyond  the  figures  of  1899. 


APPENDIX 

Outline   of  the   Uniform  Accounting  Re- 
quirements for  Operations  of  Steam 
Railroads,    as  Prescribed  by  the 
Interstate   Commerce 
Commission 


Classification  of  Operating  Revenues  : 

A.  Revenue  from  Transportation.  This  classilication  includes 
the  following:  1.  Freight  Revenue.  2.  Passenger  Rev- 
enue. 3.  Excess  Baggage  Revenue.  4.  Parlor  and  Chair 
Car  Revenue.  5.  Mail  Revenue.  6.  Express  Revenue.  7. 
Milk  Revenue  (on  passenger  trains.)  8.  Other  Passenger 
Train  Revenue.  9.  Switching  Revenue.  10.  Special  Ser- 
vice Train  Revenue.  11.  Miscellaneous  Transportation 
Revenue. 

B.  Revenue  from  Operations  Other  Than  Transportation : 
This  classification  includes  the  following:  1.  Station  and 
Train  Privileges.  2.  Parcel  Room  Receipts.  3.  Storage — 
Freight.  4.  Storage — Passenger.  5.  Car  Service.  6.  Tele- 
graph and  Telephone  Service.  7.  Rents  of  Buildings  and 
Other  Property.  8.  Miscellaneous,  y.  Joint  Facilities  Rev- 
enue.— Dr.     10.  Joint  Facilities   Revenue — Cr. 

Classification  of  Operating  Expenses: 

A.  Maintenance  of  Way  and  Structures.  This  classification 
includes  the  following:  1.  Superintendence.  2.  Ballast. 
3.  Ties.  4.  Rails.  5.  Other  Track  Material.  C.  Main- 
tenance of  Roadway  and  Track.  7.  Removal  of  Snow, 
Sand  and   Ice.     8.  Tunnels.     9.   Bridges,  Trestles  and  Cul- 

215 


21G  Appendix 


verts.  10.  Over  and  Under  Grade  Crossings.  11.  Grade 
Crossings,  Fences,  Cattle  Guards  and  Signs.  12.  Snow  and 
Sand  Fences  and  Snow  Sheds.  13.  Signals  and  Interlock- 
ing Plants.  14.  Telegraph  and  Telephone  Lines.  15.  Elec- 
tric Power  Transmission.  16.  Buildings,  Fixtures  and 
Grounds.  17.  Docks  and  Wharves.  18.  Roadway  Tools 
and  Supplies.  19.  Injuries  to  Persons.  20.  Stationery  and 
Printing.  21.  Other  Expenses.  22.  Maintaining  Joint 
Tracks,  Yards  and  Other  Facilities — Dr.  23.  Maintaining 
Joint  Tracks,  Yards  and  Other  Facilities — Cr. 

B.  Maintenance  of  Equipment.  This  classification  includes 
the  following  accounts :  1.  Superintendence.  2.  Steam 
Locomotives — Repairs.  3.  Steam  Locomotives — Renewals. 
4.  Steam  Locomotives — Depreciation.  5.  Electric-  Locomo- 
tives— Repairs.  6.  Electric  Locomotives — Renewals.  7. 
Electric  Locomotives — Depreciation.  8.  Passenger  Train 
Cars — Repairs.  9.  Passenger  Train  Cars — Renewals.  10. 
Passenger  Train  Cars — Depreciation.  11.  Freight  Train 
Cars — Repairs.  12.  Freight  Train  Cars — Renewals.  13. 
Freight  Train  Cars — Depreciation.  14.  Electric  Equip- 
ment of  Cars — Repairs.  15.  Electric  Equipment  of  Cars 
— Renewals.  16.  Electric  Equipment  of  Cars — Deprecia- 
tion. 17.  Floating  Equipment — Repairs.  18.  Floating 
Equipment — Renewals.  19.  Floating  Equipment — Depreci- 
ation. 20.  Work  Equipment — Repairs.  21.  Work  Equip- 
ment— Renewals.  22.  Work  Equipment — Depreciation.  23. 
Shop  Machinery  and  Tools.  24.  Power  Plant  Equip- 
ment. 25.  Injuries  to  Persons.  25.  Stationery  and  Print- 
ing. 26.  Other  Expenses.  27.  Maintaining  Joint  Equip- 
ment at  Terminals — Dr.  28.  Maintaining  Joint  Equipment 
at    Terminals — Cr. 

C.  TraMc  Expenses.  This  classification  includes :  1.  Superin- 
tendence. 2.  Outside  Agencies.  3.  Advertising.  4.  Traf- 
fic Associations.  5.  Fast  Freight  Organizations.  6.  Indus- 
trial and  Immigration  Bureaus.  7.  Stationery  and  Print- 
ing.    8.  Miscellaneous   Expenses. 

D.  Transportation  Expenses.  This  classification  includes :  1. 
Superintendence.  2.  Dispatching  Trains.  3.  Station  Em- 
ployes. 4.  Weighing  and  Car  Service  Associations.  5. 
Coal  and  Ore  Docks.  6.  Station  Supplies  and  Expenses. 
7.  Yardmasters  and  their  Clerks.  8.  Yard  Conductors  and 
Brakemen.  9.  Yard  Switch  and  Signal  Tenders.  10.  Yard 
Supplies  and  Expenses.     11.  Yard  Enginemen.     12.  Engine- 


Appendix  217 


house  Expenses — Yard.  13.  Fuel  for  Yard  Locomotives. 
14.  Water  for  Yard  Locomotives.  15.  Lubricants  for  Yard 
Locomotives.  16.  Other  Supplies  for  Yard  Locomotives. 
17.  Operating  Joint  Yards  and  Terminals.  18.  Operating 
Joint  'W'lrds  and  Terminals — Cr.  19.  Motormen.  20. 
koad  Enginemen.  21.  Enginehouse  Expenses — Road.  22. 
Fuel  for  Road  Locomotives.  23.  Water  for  Road  Loco- 
motives. 24.  Lubricants  for  Road  Locomotives.  25. 
Other  Supplies  for  Road  Locomotives.  26.  Operating 
Power  Plants.  27.  Purchased  Power.  28.  Road  Trainmen. 
29.  Train  Supplies  and  Expenses.  30.  Interlockers,  and 
Block  and  Other  Signals.  31.  Crossing  Flagmen  and  Gate- 
men.  32.  Drawbridge  Operations.  33.  Clearing  Wrecks. 
34.  Telegraph  and  Telephone — Operation.  35.  Operating 
Floating  Equipment.  36.  Express  Service.  37.  Stationery 
and  Printing.  33.  Other  Expenses.  39.  Loss  and  Damage 
—Baggage.  40.  Damage  to  Property.  41.  Damage  to 
Stock  on  Right  of  Way.  42.  Injuries  to  Persons.  43. 
Operating  Joint  Tracks  and  I""acilities — Dr.  44.  Operating 
Joint  Tracks  and  Facilities — Cr. 
E.  General  Expenses.  This  classification  includes  the  follow- 
ing accounts:  1.  Salaries  and  Expenses  of  General  Of- 
ficers. 2.  Salaries  and  Expenses  of  Clerks  and  .\ttendants. 
3.  General  Office  Supplies  and  Expenses.  4.  Law  Ex- 
penses. 5.  Insurance.  6.  Relief  Department  Expenses.  7. 
Pensions.  8.  Stationery  and  Printing.  9.  Other  Expenses. 
10.  General  Administration  Joint  Tracks.  Yards  and  Term- 
inals— Dr.  il.  General  Administration  Joint  Tracks,  Yards 
and   Terminals — Cr. 

Classification  of  Revenues  and  Expenses 
for  Outside  Operations  : 

Outside  Operations  embrace  the  following  accounts.  1. 
Boat  Lines.  2.  Ferry  Lines.  3.  Harbor  Terminal  Trans- 
fers. 4.  Electric  Railways.  5.  Express  Lines.  6.  Cab 
and  Omnibus  Service.  7.  Sleeping  Car  Service.  S.  Parlor 
and  Chair  Car  Service.  9.  Dining  and  Special  Car  Ser- 
vice. 10.  Electric  Light  and  Power  Plants.  11.  Gas  Pro- 
ducing Plants.  12.  Canals.  13.  Grain  Elevators.  14.  Stock 
Yards.  15.  Commercial  Telephone  and  Telegraph  Lines. 
16.  Hotels  and  Restaurants.  17.  Amusement  Parks  and 
Resorts.  IS.  Coal  Storage  Plants.  10.  Cold-Storage 
Plants.  20.  Commercial  Ice  Supply  Plants.  21.  Public 
Toll  Bridge  Service.     22.  Miscellaneous. 


218  Appendix 

Classification  of    Expenditures  for    Con- 
struction of  Road  and  Equipment : 

A.  Road.  This  classification  embraces  the  following  accounts : 
1.  Engineering.  2.  Right  of  Way  and  Station  Grounds. 
3.  Real  Estate.  4.  Grading.  5.  Tunnels.  6.  Bridges, 
Trestles  and  Culverts.  7.  Ties.  8.  Rails.  9.  Frogs  and 
Switches.  10.  Track  Fastenings  and  Other  Materials.  11. 
Ballast.  12.  Track  Laying  and  Surfacing.  13.  Roadway 
Tools.  14.  Fencing  Right  of  Way.  15.  Crossings  and 
Signs.  16.  Interlocking  and  other  Signal  Apparatus.  17. 
Telegraph  and  Telephone  Lines.  18.  Station  Buildings 
and  Fixtures.  19.  "General  Office  Buildings  and  Fixtures. 
20.  Shops,  Engine  Houses  and  Turntables.  21.  Shop  Ma- 
chinery and  Tools.  22.  Water  Stations.  23.  Fuel  Stations. 
24.  Grain  Elevators.  25.  Storage  Warehouses.  26.  Dock 
and  Wharf  Property.  27.  Electric  Light  Plants.  28.  Elec- 
tric Power  Plants.  29.  Electric  Power  Transmission.  30. 
Gas-Producing  Plants.  31.  Miscellaneous  Structures.  32. 
Transportation  of  Men  and  Material.  33.  Rent  of  Equip- 
ment. 34.  Repairs  of  Equipment.  35.  Earnings  and  Oper- 
ating Expenses  during  Construction.  36.  Injuries  to  Per- 
sons.    37.  Cost  of  Road  Purchased. 

B.  Equipment.  This  classification  embraces  the  following  ac- 
counts :  1.  Steam  Locomotives.  2.  Electric  Locomotives. 
3.  Passenger  Train  Cars.  4.  Freight  Train  Cars.  5.  Work 
Equipment.     6.  Floating  Equipment. 

C.  General  Expenditures.  This  classification  embraces  the 
following  accounts :  1.  Law  Expenses.  2.  Stationery  and 
Printing.  3.  Insurance.  4.  Taxes.  5.  Interest  and  Com- 
missions.     6.      Other    Expenditures. 


"  ^Jie  One  Ahsolutely  Indis'^ensahle  Book 

MOODY'S  ANALYSES  OF 
RAILROAD    INVESTMENTS 

ISSUED  ANNUALLY 

By  JOHN  MOODY 


ScODe  of        ^^    ANALYZES    the    annual    re- 
.  y        ports   of   all   the   railroads   in   the 

country  by  a  method  which  en- 
ables the  user  of  the  book  to  ascertain  at  a  glance 
the  TRUE  VALUE  of  all  of  the  Bond  and  Stock 
issues.  Bankers  and  Brokers  frequently  hire  ex- 
perts at  fees  ranging  all  the  way  from  $500  to 
$1,000  each  to  analyze  particular  railroad  sys- 
tems for  them.  This  book  furnishes  equally  com- 
plete analyses  of  all  the  railroads  in  the  United 
States,  the  figures  being  all  brought  down  to  the 
end  of  the  latest  fiscal  year,  and  the  subject 
treated  in  every  case  in  an  absolutely  impartial 
and  unbiased  manner. 


"The  book   is  original   and   unique   and   supplies  a   want 
not  heretofore  covered  by  financial  publications." 

Commercial  &  Financial  Chronicle,  Xezv  York. 


This  book  is  of  practical  value  not  merely  to 
one  class  in  the  investment  field,  but  to  all.  It 
is  not  simply  a  Bond  Broker's  or  Stock  Broker's 
text  book,  but  embraces  features  of  unusual  use- 
fulness to  Railroad  Officials,  Investors,  Financial 
Institutions  and  many  others.  It  is  the  one  ab- 
solutely indispensable  book  for  the  Investment 
Banker;  the  Bond  Dealer;  the  Stock  Broker; 
Banks  and  Trust  Companies ;  Savings  Banks ;  In- 
surance Companies;  the  Individual  Investor-  the 
Bond  Salesman;  Railroad  Officials. 

Physical         ^"   ^^^   "Analyses,"   the   physical 
|--.       ,  characteristics    of    each    road    are 

first  dealt  with.  These  embrace 
a  description  of  the  location  and  Territory,  a 
table  showing  the  diversity  of  the  Freight  Ton- 
nage for  ten  years,  and  a  further  table,  contain- 
ing a  complete  TEN-YEAR  RECORD  of  Mile- 
age, Equipment,  Passenger  and  Freight  Density, 
Average  Revenue  Train  Load,  Trainmile  Earn- 
ings, and  Passenger  and  Freight  Rates.  These 
items  are  then  averaged  for  the  ten-year  period, 
and  a  COMPARISON  made  with  like  averages 
of  four  other  systems  operating  in  similar  terri- 
tory. Comments  are  made  by  the  writer  on  the 
exhibits  shown  in  each  case,  thus  furnishing  a 
proper  and  simple  interpretation  of  the  figures 
for  the  use  of  BANKERS,  BROKERS  and  IN- 
VESTORS generally. 


220 


The  foregoing  method  is  applied  to  every  rail- 
road system  analyzed,  and  forms  a  complete  ten- 
year  detailed  view  of  the  changes  in  the  property 
in  a  physical  and  operating  sense. 

T-,^^,^^  A  Ten-year  record  is  presented  of 

Income 

_,  ^  the  INCOME  ACCOUNT  of  each 

Factors  i      i       i  ^  i         i 

road  reduced  to  a  mileage  basis. 
This  table  covers  the  Gross  Revenue.  Mainten- 
ance Expenditures,  Transportation  and  Traffic 
Expenses,  Net  Operating  Earnings,  Total  Net 
Income,  Eixed  Charges,  Margin  of  Safety  over 
charges.  Surplus  Available  for  Dividends, 
amounts  paid  in  Dividends,  amounts  spent  in 
Improvements,  etc.  These  items  covering  the 
ten-year  periods  are  then  averaged,  and  the  aver- 
ages compared  in  each  case  with  those  of  four 
other  similar  systems.  The  entire  exhibit  is  com- 
mented on  by  the  writer,  its  strong  and  weak- 
points  being  brought  out  clearly  in  each  case. 

This  analysis  of  income  accounts  forms  a  com- 
plete ten-year  view  of  the  changes  of  each  prop- 
erty in  its  earning  and  dividend-paying  power. 
It  gives  just  the  information  which  the  STOCK- 
HOLDER or  the  BONDHOLDER  needs,  but 
usually  finds  so  difficult  to  obtain. 


A   Ten-year   record    is   next   pre- 
sented of  the  BALANCE  SHEETS 
of  each  railroad  system,  reduced  to 
a  mileage  basis.       This  exhibit  shows  the  Stocks 


apl  a  ^^^^^  J  ^^^  ^j^^  BALANCE  SHEETS 

Factors         f      i      i      >      .  i      ^ . 

of  each  railroad  svstem,  reduced  to 


and  Bonds  Outstanding,  the  amount  of  Rental 
Obligations  (capitalized  at  5%),  amounts  of  Se- 
curities or  Investments  owned,  the  Net  Capitali- 
zation of  each  road,  and  the  Percentage  of  Net  In- 
come on  Net  Capital.  A  Dividend  Record  is  also 
presented  in  this  Table,  and  all  figures  cover  the 
full  period  of  ten  years.  Averages  of  the  Ten- 
year  figures  are  shown,  and  comparisons  made 
with  four  other  properties,  as  in  the  case  of  the 
other  tables.  Finally,  analytical  comments  are 
made  by  the  author  on  the  entire  exhibit,  point- 
ing out  the  strong  or  weak  features  on  the  finan- 
cial side  of  the  property. 

r>^-j  A  complete  record  of  every  rail- 

.  road  bond  issue  of  each  system  is 

Ratings  furnished,  the  different  issues  be- 

ing listed  according  to  their  priority  and  general 
security.  A  Rating,  based  on  the  relative  strength 
of  each  issue  is  then  given.  These  ratings  are 
presented  on  a  plan  similar  to  that  employed  by 
mercantile  agencies  in  rating  the  credit  of  mer- 
chants. Thus,  a  very  high-grade  bond,  such  as 
Lake  Shore  Sy^s,  is  rated  Aaa;  one  of  lower 
grade,  like  Baltimore  &  Ohio  Southwestern  3^s, 
is  rated  Aa;  Erie  consol.  4s  are  rated  A  ;  Missouri 
Pacific  refunding  5s.  Ba;  while  much  lower  grade 
issues,  such  as  Erie  convertibles,  get  a  rating  of 
B,  and  much  more  speculative  bonds,  with  doubt- 
ful futures,  are  rated,  Ca,  C  D,  etc.  Information 
is  given  in  each  case  for  demonstrating  how  the 


rating  is  arrived  at;  tlie  nature  ot  tlie  lien  is 
shown,  amounts  outstanding  i)cr  mile  are  given 
and  it  is  stated  in  each  case  in  what  State,  if  any. 
the  issue  is  Ici^al  for  sa7-i)ii^s  hanks. 

This  method  of  listing  and  rating  is  applied  to 
every  railroad  bond  issue,  over  1,500  bond  issues 
being  rated  in  the  book. 

Sf-ork  ^  complete  record  of  every  stock 

Q       .  issue  of  each  system  is  also  furn- 

o  ished,  including  all  the  guaranteed 

stocks.  The  different  issues  are  listed  according 
to  their  priority  in  claim  on  income,  interest  in 
equity,  etc.  A  rating  similar  to  that  applied  to 
the  bond  issues,  is  given  each  stock.  Thus,  all 
good  guaranteed  stocks  are  rated  .laa  or  Aa,  pre- 
ferred issues  with  a  strong  record  are  ^also  rated 
high,  some  common  stocks  get  the  highest  rating, 
while  the  position  of  the  more  speculative  issues 
is  shown  by  ratings  running  down  from  A  to  D 
or  E.  Defaulted  bond  issues,  and  stocks  await- 
ing the  results  of  reorganization,  arc  of  course  in 
most  cases  rated  very  low.  As  in  the  bond 
record,  information  is  given  in  connection  with 
each  stock,  showing  the  terms  of  the  lease,  if  any, 
or  the  basis  of  its  position  in  earnings  or  equity. 

A    Ten  I"  the  back  of  the  volume  a  ten- 

Year  Price  year  record  of  prices  of  stocks  and 
Range  bonds   is   presented,   showing   the 

highest   and   lowest   quotatit^ns   of   each    issue   in 


every  year  of  the  decade.  No  complete  record 
of  this  nature  has  ever  before  been  presented, 
and  its  extraordinary  value  to  Bankers,  Brokers 
and  Investors  need  not  be  emphasized  here. 

Only  Book  No  other  financial  reference  book 
Of  This  in  the  world  treats  the  subject  of 

ivina  railroad  investments  in  this  way. 

In  fact,  "Moody's  Analyses  of  Railroad  Invest- 
ments" is  the  single  publication  which  furnishes 
any  uniform  analysis  of  railroad  values. 


Price  of  Book,  $12.00  per  copy,  net;  $12.50  delivered  to 

any  part  of  the  United  States,  Canada,  Mexico 

or  Europe. 

Published  by   the 

ANALYSES   PUBLISHING  CO., 

35  Nassau  Street,  New  York  City. 
Telephone,  1299  Cortlandt. 


].  C.  &  VV.  E.  Powers 

Piintcrs 

65-67  Duane  Street,  New  York 


.\Wf 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 
This  book  is  DUE  on  the  last  date  stamped  below. 


y.        41585 


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